How To Build A Futures Free Commodity Portfolio With ETFs (HAP, LIT, REMX, CROP, GLTR, CCX)

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September 10, 2012 11:48am NYSE:CROP NYSE:GLTR

Daniela Pylypczak: For commodity traders, futures contracts and futures-based products are usually the go-to financial instruments for gaining exposure to your favorite hard assets. While futures investing may be appealing, there are many serious


drawbacks and costly nuances to this strategy that can impact bottom-line returns. And without fully understanding how futures work and without being able to frequently monitor a trade, futures positions can quickly turn sour. For those who wish to avoid futures, we outline an all ETF portfolio that is designed to provide well-rounded exposure across all of the major commodities completely devoid of these contracts [for more commodity news and analysis subscribe to ourfree newsletter].

Portfolio Snapshot

First things first, here are the ETFs that we have chosen for this particular portfolio.

Ticker ETF Asset Type Allocation Expense Ratio
HAP Market Vector Hard Assets Producers ETF International Equities 30.0% 0.59%
LIT Global X Lithium ETF International Equities 10.0% 0.75%
REMX Market Vectors Rare Earth/Strategic Metals ETF International Equities 10.0% 0.57%
CROP IQ Global Agribusiness Small Cap ETF International Equities 10.0% 0.75%
GLTR ETF Securities Physical Precious Metal Basket Shares Commodity 10.0% 0.60%
CCX Dreyfus Commodity Currency Fund Currency 30.0% 0.55%
Weighted Average Expense Ratio 0.61%

As can be seen above, every single fund in this portfolio is somehow related to the commodity industry. The portfolio features exposure to commodity producer equities, physical bullion, and even currency allocations to top commodity producing countries.

Holdings Overview

Below is a brief overview of each component of this portfolio.

  •  HAP: This ETF offers broad global exposure to the largest and most prominent companies engaged in the production and distribution of hard assets.
  • LIT: This ETF tracks the Solactive Global Lithium Index , which is designed to reflect the performance of the lithium industry.
  • REMX: This fund offers diversified exposure to publicly traded companies primarily engaged in the mining, refining, and manufacturing of rare earth/strategic metals.
  • CROP: This ETF gives investors access to small cap companies around the globe engaged in the agribusiness sector, including crop production, livestock operations, and biofuels [see also 50 Ways To Invest In Agriculture].
  • GLTR: This fund tracks the Precious Metals Basket Index and provides physically-backed exposure to gold, silver, palladium, and platinum.
  • CCX: This ETF invests in money market instruments in selected commodity-producing countries, including Brazil, Russia, and Australia.

Historical Return Analysis

Ticker 2008 2009 2010 2011
HAP n/a 42.5% 16.5% -11.7%
LIT n/a n/a n/a -37.0%
REMX n/a n/a n/a -33.9%
CROP n/a n/a n/a n/a
GLTR n/a n/a n/a -2.4%
CCX n/a n/a n/a -3.1%
Portfolio n/a n/a n/a n/a
Compare to SPY -36.7% 26.3% 15.0% 1.8%
Compare to AGG 7.6% 3.3% 6.4% 7.7%

The adjacent table provides historical results for each component of this portfolio, as well as backtested results (as available) for the entire portfolio during 2008, 2009, 2010, and 2011. The table also shows how this portfolio performed relative to a popular stock market benchmark (NYSEARCA:SPY) and bond benchmark (NYSEARCA:AGG).

The majority of the funds included in this portfolio have launched in 2011, and as expected historical performance data is quite limited.

It’s worth noting that commodity producing firms, as represented by HAP, were able to grossly outperform the broad stock market in 2009, while also managing to inch ahead in 2010 as well. The market slump in 2008 highlights the importance of including even minimal allocations to fixed income holdings.

Portfolio Expenses

This portfolio is designed for long-term use consistent with a “buy, hold, and rebalance” strategy. As such, minimization of expenses is necessary to avoid return erosion resulting from compounding costs. To this end, we constructed a portfolio with a weighted-average expense ratio of 61 basis points, which is significantly lower than fees charged by actively-managed mutual funds. The impact of this reduced costs structure over the horizon of this portfolio (i.e., the 30 years during which the client will be retired) is significant [see also The Ten Commandments of Commodity Investing]:

Growth of $1 Million Over 30 Years @ Annual Return Of:
Portfolio Expense Ratio 5% 10% 15%
Futures Free Commodity Portfolio 0.61% $3,629,876 $14,772,288 $56,461,927
Actively-Managed Mutual Fund Portfolio 1.00% $3,243,398 $13,267,678 $50,950,159

While this can certainly be used as an all encompassing group of holdings, those wishing to stay clear of futures exposure can also use this model portfolio as a smaller part of their overall group of holdings.

Disclosure: Certain sections of this article were republished with permission from ETFdb.com. Click here to view the original portfolio. No positions at time of writing.

Written By Daniela Pylypczak From CommodityHQ  Disclosure: No Positions.

CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.


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