Lawrence Meyers: Commodity ETFs have a place in every portfolio, just not a big place.
Of all the investments in the market, the one area that tends to generate the most controversy is commodities. Some long-term portfolio managers insist that the cyclical nature of commodities, along with their high volatility, suggest they have no place in your portfolio. Others, including myself, believe commodities do have a place in a long-term portfolio.
I don’t think you should allocate massive amounts to commodity investments, but there is a reason to have them. Enough studies have been done that show portfolio risk declines somewhat to make me a believer. Yet, I also go with common sense. The world will always consume. It has to. That means that natural resources and commodities will always have buyers. Overall consumption will increase over time as the population increases. So while the short-term may see price fluctuations, we should see long-term price appreciation in commodities.
I would invest using ETFs, so you remain diversified, and keep commodities to less than 5% of your portfolio.
1. PowerShares DB Base Metals (NYSE:DBB)
PowerShares DB Base Metals (NYSE:DBB) is an ETF that tracks the performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Metals Excess Return. This contains futures contracts on the most frequently used metals – aluminum, zinc and copper. Going with the theory that all of these metals will always have some purpose in human existence, owning a basket of contracts that trades them should do well in the long term. So now you have base metals covered.
Metals can also provide a hedge against inflation since their process tend to increase with the cost of living.
2. ELEMENTS Rogers International Commodity ETN (NYSE:RJI)
ELEMENTS Rogers International Commodity ETN (NYSE:RJI) is more intriguing that an ETF. Instead of actually holding futures contracts, this security is obligated to give you the same return as if you did own the contracts. Rogers is well-diversified, as it contains 35 commodity future contracts, and is rebalanced monthly. Energy is the big play here, with about 45% of holdings allocated to these commodities, with agricultural commodities taking up 32% and the rest consisting of the metals.
ETNs can have what’s called “credit risk”, in that the company that issues it takes all of its value with it if it goes under, meaning its exchange-traded notes could literally go to zero. In this case, however, Rogers is backed by the Swedish Export Credit Corporation, which backs all the notes.