What about commodities?

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:

  1. 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.
  2. 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.
  3. 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.

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