My Commodities Basket got clobbered today - DBC

MikeM

My play on DBC, Invesco DB Commodity Index Tracking Fund, dropped ~-8% today. That ETF has helped smooth the down turn YTD but all good things must come to end I guess. I did have a stop limit order of -5% from high to sell 20%. That struck when the markets opened. Maybe it should have been more(?).

I still think commodities are a good bet through 2022. I started a play on DBA, Invesco DB Agriculture Fund. Seems a safer play on inflation. Energy is just too over-priced right now.

hank

Well, pour yourself a tall one!

I haven’t been a serious player in commodities for a long time. RIO was up slightly today (to my surprise) and my two precious metals miners were slightly up - even though gold fell about 3%. Gold got hit a lot harder than the p/m miners today.


EDIT: - M* showed RIO slightly up late Wednesday. However it has the stock down 6% on Thursday morning. I checked and found that Thursday (today) is also its “X Dividend” date. So, I’m guessing that’s why the change from positive Wednesday to negative Thursday morning.

FWIW - Rio Tinto (RIO) is a a British based global mining company. Second largest in the world. Iron ore and a lot of rare earth special application minerals plus some precious metals. Currently 2% of my total portfolio.

yogibearbull

Commodities are volatile. They have been red hot, but they don't just go up, and today they sank (temporary?). Many commodity indexes (and ETFs) are heavy in energy or some other sector. There are commodity ETFs that dynamically select commodities with best/better prospects; 3 such did TERRIBLE today, PDBC -7.87%, COMT -10.53%, USCI -10.88%.
https://finance.yahoo.com/quotes/PDBC,COMT,USCI/view/v1

Charles

Daily movement lately is amazing. Wide, rapid swings. Seems to get worse every week. In just about everything, not just commodities.

yogibearbull

Yep, the markets may be a bit unstable here. Look at various "VIXs" and the related implied daily volatilities (most of the time; and 2x and 3x quite possible).

SP500 VIX 32.45, daily +/- 1.71%
Nasdaq-100 VXN 35.34, daily +/- 1.86%
Oil OVX 73.25, daily +/- 3.86%

MikeW

I thought this was an interesting post today:

Chart of the Day

Today’s Chart of the Day was shared by Shane Murphy (@murphycharts). It's a daily candlestick of the Energy sector over the past six years. The Energy sector is up more than 35% year-to-date, making it the best performing sector by a mile. It hit a seven-year high yesterday, before reversing hard today around $585 ($79 in $XLE). This level acted as resistance five times between 2016-2018. Will the sixth time be the charm? Or, will price continue to be rejected at this familiar level? Either way, this is a pretty important test for the best-performing sector in the S&P 500.

yogibearbull

$80 may be a critical level for XLE, but its all-time high is higher. And if it cannot breakout beyond $80 this time, it may never. It may be a reversal today, or not.

M* XLE Price 1/1/07-

Stockcharts _XLE 1/1/07-

Sven

@MikeM, I believe inflation is here to stay for the near term. I too invest in DBC but the mutual funds available are a bit less volatile: VCMDX and EAPCX.

Will do more work on DBA and report back.

sma3

I have about 2.5% of my portfolio in various commodity funds, mostly general commodity mutual funds. You need to look under the hood, as a number of the general funds are heavily weighted to energy, esp oil. That has been great this year, but not last year. There are specialty funds for almost any commodity you could want, but it is not clear why an investor would want a focused "cotton" fund for example, unless bought at a multi year low hoping it had to go up.

Some of the "agriculture " funds own stocks like Deere which is less of a commodity investment

It seems likely to me with war, inflation, energy and climate change, the price of almost every agricultural commodity will go up as the supply becomes scarcer. People have to eat. High priced cotton, coffee would probably reduce demand, but this seems less true of wheat, corn etc.

DBA is up 14% this year and 40% since I bought it.

Of course, my thought that water would also become more valuable has been less successful as PHO is down17% this year, probably because it invests in equities with rel high PEs and some utilities

BenWP

You are right about water funds, @sma3. I own FIW and its industrial tilt has not escaped the market downturn. I have been in and out of KROP (AgTech and Food Innovation), a more indirect play on food price increases. I'm back in now, along with PDBC which also has ag exposure. KROP owns some conventional food companies, but Nutrien and Corteva are its largest holdings.

sma3

M* has a new analysis of why several "rated" commodity funds have not beaten the index this year, mostly due to holding longer term contracts than the ones that are going parabolic this year.

OF course having tempted you, I read it this morning on my iPad and can't find it to copy. Will keep trying.

There is a useful explanation of contago and backwardation in this link.

https://www.morningstar.com/articles/1070971/commodities-inflation-hedge-or-fools-gold

They use USO as an example of a an ETF that has failed miserably over the years to follow the price of the underlying commodity.

another M* article that answers the question "are they diversification for long term investments" The answer of course, using M* methodology is NO.

https://www.morningstar.com/articles/1074884/do-commodities-have-a-place-in-your-portfolio


Another reason why an actively mangled mutual fund might be best.

I have used GRHAX SPCAX and GCC but you have to look carefully at what the particular fund actually does over time and how it preforms.

sma3

here is M* article re recent performance

https://www.morningstar.com/articles/1083759/why-are-so-many-commodity-funds-falling-short

Mark

Lynn Bolin "Searching for the Best Commodity Funds"

SeekingAlpha ARTICLE of about 5 days ago

MikeM

Thanks @Mark for Lynn's article.

Nice piece @lynnbolin2021. I agree with your reasoning for owning some commodities in a portfolio. These cycles tend to last many years. Question, did you not include DBC/PDBC because of the high energy-oil percentage? Just curious.

FWIW, here is short video of a show comparing DBC with DBA. I now own both, but much more weighted in DBC. I've owned that one for about a year now.

https://finance.yahoo.com/news/etf-battles-dba-vs-dbc-131500183.html

Charles

Ed recently floated a suggestion that the new 60/40 should be equity/commodities.

yogibearbull

Not sure about 40% in commodities, but newer multi-asset funds have stocks + bonds + alternatives (that include commodities). Stock and bond portions may be more aggressive than those in typical 60-40 fund. Commodities are very volatile and little of it goes a long way.

Derf

Charles a one time shot - 60 bonds 40 commodities for the beginning of the year !
Hind sight, Derf

MikeM

@Derf, hindsight or awareness? Commodities are an inflation hedge. People have been talking about the risk of high inflation for at least a year now. That said, I wouldn't sleep well with a 60:40 equity/commodities portfolio, but it may does make sense to me to have some related inflation hedge in your portfolio now, IMHO. Putin's war has driven this asset up exponentially, especially oil/energy, and commodities may see a significant drop if the war comes to a conclusion, but this sector was moving up just fine due to the call for rising rates and inflation anyway. Same for gold and other natural resources I believe.

hank

Commodities will work until they don’t. Like equities, they are prone to boom and bust cycles. No way to predict how long this bull cycle will run. I looked at the James Stack charts / suggested allocations this morning to make sure I wasn’t wildly underexposed. Turns out I’m more or less in line with Stack’s view (though I can’t vouch for his abilities). In mid February he had 4% in materials, 4% in energy and 5% in gold.

Yes. We have inflation. Even during the inflation of the 70s and 80s there were boom and bust cycles in energy, gold and other commodities. It’s not an automatic given they will always rise along with inflation. And, if your mutual fund manager is on the job, he / she should have exposure to commodity producing or selling companies or companies that stand to benefit from it. Some recent references on the board to John Deere being held in commodity or AG funds illustrate that point that a seemingly non-commodity company can in fact help hedge against commodity inflation.

I do wish I’d followed Stack’s recommendation to avoid fixed income and put 25% in cash. Looking back several weeks, that would have been the right move. I plan to subscribe to the 3-month trial when the new issue is released March 18 as I found the reading stimulating.

My earlier link to free InvestTech offer


BTW - @MikeM is spot on about needing to hedge your bets in these markets. Commodities / precious metals are but one of several approaches one can use. But that’s for another discussion.

sma3

Investech is a pretty good analysis of overall market, with a great track record of avoiding large downdrafts.

However, Stack's model portfolio is all in equity ETFs, not true commodity funds. Currently he has 4% in XLE( energy), 4% in XLB( Basic materials), 6% XLI ( industrials) and 5% GDX ( Gold miners). XLE trades closest to an underlying commodity, I guess wit GDX second.

However the correlations with the SP500 for all of these ETFs are pretty high. Last one year, only XLE was negative. Three years GDX the lowest still has R of .46.

Commodity ETFs like DBC, DBA and GCC all have very low correlations to SP500. Always under .3 and for the last year close to zero.

I certainly agree there are busts in Commodity cycles, but when the are at the bottom of a cycle, a small percentage is a great diversifier, especially at the valuations of the SP500 we have now.

hank

Thank you @sma3 for filling in the blanks.

sma3

COM recommended by @lynnbolin2021 is an interesting idea. I am partial to actively managed funds here, and two of my choices SPCAX and GRHAX have better 1 year records. However, a quick analysis shows COM did have much less MAX DD 3/2020.

It has been around since 2017 although an OEM using the same strategy DXCIX died on the vine, for unclear reasons. There is still a reference on the website

While it claims it follows an index, the index is revamped monthly and it looks like the mangers have the ability to make daily changes to the portfolio. It seems to be a bit of a black box to me

Sven

COM’s lower MaxDD is very compelling comparing to BCOM index and other commodity funds/ETFs. The actively managed aspect and rule-based weighing of 12 sectors are quite attractive in this otherwise very volatile asset class. The references within the SA discussed further on the rule-based decision.

In addition to COM, @lynnbolin2021 also recommended DBC and FSRRX (26% commodity) as lower risk candidates for commodity exposure. All of these commodity funds have done much better than most stocks and bonds thus far.