First time investors in DBC, who haven’t done their homework, will be surprised when they receive a K-1 for partnership income that does not correlate to their dividends or capital gains. The reason for this is that the fund must be structured as a partnership in order to participate in buying commodity futures contracts. When you purchase DBC you are considered to be participating in the gains or losses of the partnership and thus receive a K-1 statement that must be dealt with on your tax return.
This additional tax burden may be a headache that individual investors can avoid by simply finding an alternative such as the iPath S&P GSCI Total Return ETN (GSP). The underlying index that GSP tracks is similar to DBC and you won’t receive a K-1 because it is structured as an exchange-traded note.
5. Don’t get Too Overweight In One Area
ETFs by nature are diversified investment vehicles, but often times I review portfolios that are very much overweight in one area such as precious metals, technology, or even cash. I always recommend that you consider using core positions such as the iShares MSCI Minimum Volatility ETF (USMV) or the Vanguard Total Stock Market ETF (VTI) as the building blocks for your asset allocation. Then layer in sectors such as the Healthcare Select Sector SPDR (XLV) or First Trust NASDAQ Technology Dividend Index (TDIV) to enhance your returns.
In addition, it’s important to balance your asset allocation across bonds, commodities, and international stocks by expanding and collapsing those sleeves when conditions are most favorable. This will ensure that you are staying diversified and taking a proactive approach to managing your portfolio.
The following post was republished with permission from FMD Capital.