The long-term case for diversifying clients’ portfolios with commodities is solid. But the performance of the major commodities indexes in the past few years illustrates the potential drawback to investing for coverage of multiple markets.
The Dow Jones-UBS Commodity Index peaked in April 2011. Although there have been a few upward-price reversals since then, the overall trend through 2013 has been lower.
Ed Egilinsky, head of alternatives for Direxion Funds in Milwaukee, Wis., cites several reasons for the overall weakness in commodities, including Fed tapering and a strengthening dollar among them. Nicholas Brooks, head of research and investment strategy at ETF Securities in New Yorky, points to slowing growth in China and expectations for greater supplies as additional factors.
The market indexes by definition include a large number of components. The Dow Jones-UBS Commodity Index, for instance, is comprised of over 20 weighted commodities. By drilling down into the individual commodities, however, it’s possible to spot those that offer potential profits over the next year or so.
One investment strategy is to follow price trends; that’s the approach Direxion takes with the 12 commodities it monitors for its funds. The firm follows a rules-based price-trends method based on an index licensed from Auspice Capital, a futures trader.
If a commodity’s price trend is positive, Direxion takes a long position. If the trend is negative, the funds go “flat” in that commodity and hold cash. That strategy can result in relatively few long positions at any one time.