17 July 2019

Advisers Stick by Commodity ETFs

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The rise of exchange-traded funds and notes makes it easy for everyone to own commodities, and many financial advisers recommend small stakes as permanent elements of a diversified portfolio. But the average broad-basket commodities ETF has lost an average of 7.9% a year in the past five years through July, according to Morningstar Inc. And the bloodletting has only intensified this year. The S&P GSCI, a benchmark for commodity-markets investments, for example, has plummeted 43.1% in the 12 months through Thursday.

That has some investors heading for the exits. Broad-basket commodity exchange-traded products overall have experienced outflows of $818 million this year through July, with $819 million and $389 million flowing out of PowerShares DB Commodity Tracking ETF (DBC) and iPath Bloomberg Commodity Index Total Return ETN (DJP), respectively, according to Morningstar. Broad-basket commodity exchange-traded products had $7 billion in assets at the end of July, Morningstar says.

Still, some financial advisers say a small allocation to commodity exchange-traded products remains important for a long-term portfolio. Viewing the performance of a commodity ETF or ETN over a specific period of time in isolation would be a mistake, these advisers say, overlooking their diversification and

Commodities have been dragged down over the past 18 months, he says, but that won’t continue indefinitely and they now offer an attractive entry point. Just a 2% to 4% allocation is sufficient for most long-term investors with balanced portfolios, says Mr. Ayers, who invests in the Elements Rogers International Commodity ETN (RJI). The ETN has declined 33.4% in the 12 months through Thursday, according to Morningstar.

Mr. Yoshikami, whose firm manages $1.5 billion in assets, says commodity exchange-traded notes can help give clients a better chance for diversified returns with less shock than one would experience with pure equities. His firm invests in iPath Bloomberg Commodity Index Total Return ETN, which tracks a broad index of commodities futures contracts. The ETN has shed 31.1% in the 12 months through Thursday.

Destination Wealth Management did reduce clients’ exposure to commodities about three years ago. A moderate investor, who might typically have 8% to 10% of his portfolio in commodities, would now have just 4% or 5% invested. Kevin Hrdlicka, manager of investment services at Savant Capital Management, says it’s been frustrating to watch stocks soar while commodities decline over the past few years. But nothing has changed from an overall investment perspective, says Mr. Hrdlicka, whose Rockford, Ill., firm manages about $4.4 billion.

Investors should have about 3% to 5% of their overall portfolios invested in commodities to reap their benefits, says Mr. Hrdlicka, who uses PowerShares DB Commodity Tracking ETF in qualified accounts and an exchange-traded note in taxable accounts. In the past year, some clients have asked about the ETF, which has declined 38.6% through Thursday, he says.

But some advisers have begun to doubt commodities’ protective benefits. Patrick Collins Jr., partner and managing director at Greenspring Wealth Management in Towson, Md., says the firm removed commodities from client portfolios a little over a year ago, and has no plan to include them in the future.

Click here to access the full article on The Wall Street Journal. 

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