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.
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