I’ve been posting a lot about seeking diversification….so what about commodities? I mean, surely they’re the obvious addition to an equity/bond portfolio?
Hmm… kinda. My 2 cents on commodities:
- Long = wrong. Long-only commodities is a poor choice, in my opinion. I think of it this way: there is no fundamental reason for commodities to endlessly grow – unlike, say, equities. Yes, each area of commodities (grains, metals, energies) has had a good run at different times. But they can fall seemingly without end (such as grains recently). A vehicle for those who disagree with me can go for an ETF such as DBC to keep long commodities exposure.
- Roll yield matters. Another reason I don’t buy long-only commodities is the roll cost. Back in the day (I’m thinking JM Keynes’s “normal backwardation” concept) most commodities paid long positions roll yield; incidentally this became a large part of the return for holding commodities. With the advent of much long-only money, backwardation became contango; thus long-only has to pay for the privilege of holding a position. I don’t like this.
- Simple strategies help a lot. Back to my days in hedge fund land. Just about any combination of momentum, carry, and seasonality strategies can outperform long-only. So I stick with these.
In sum, these reasons underpin one of the key reasons I picked a managed futures mutual fund the other day. Access to that different return stream, without paying away the roll yield each and every month.