If there’s one asset class to which most portfolios lack exposure, it’s probably commodities. It’s also an area whose recent performance has been so ugly, some investors have completely abandoned ship.
Over the past five years, broadly diversified commodity ETFs have declined around 30% on average while other asset classes like stocks and bonds have risen. Plunging crude oil and precious metals prices have been a damper. Should advisors avoid commodities?
Research interviewed Cooper Anderson, chief financial officer of GreenHaven, about the outlook for the commodities group and how to get affordable exposure to this volatile but important market.
While the Atlanta-based firm is best known for its flagship fund, the $243 million GreenHaven Continuous Commodity Fund (GCC), the commodities focused firm is still adding to its lineup. In February, the firm launched the Greenhaven Coal Fund (TONS) which tracks coal futures.
Why do you think commodities are under-represented in the typical investor’s portfolio?
There are several reasons for this. First, much of the investing public still doesn’t understand the value of adding commodities to a portfolio of traditional asset classes. This value comes from commodities’ historically low correlations with equities and bonds. Secondly, some investors perceive commodity prices as too volatile. However, in many timeframes a basket of commodities that is rebalanced regularly has actually had lower volatility than the S&P 500! It’s the use of high leverage that can really make commodity returns volatile. Third, commodity returns have underperformed other asset classes such as equities for the last several years.
The Greenhaven Continuous Commodity Index Fund (GCC) has a unique approach that makes it very different from competing commodity funds. Tell us more.
GCC tracks the Thomson Reuters Continuous Commodity Index. This index, and thus GCC, are unique for three reasons: (1) It has a much lower allocation to energy commodities at only about 18% than many of the other commodity funds which can range up to 70% in energy; (2) it is rebalanced daily so that each of the 17 commodities in the fund is kept as close to 1/17th of the total as possible, which helps reduce volatility and can add a rebalancing yield; and (3) GCC’s exposure to each commodity is not concentrated in the front month, but is spread across the nearest 6–9 months of the forward curve. This approach of spreading across the futures curve is intended to help to mitigate some of the costs of carrying a long-only futures position over time.
In the past, the CFTC has restricted the amount of futures contracts an ETP can have and it’s caused operational problems for certain ETPs. Is this still an issue?
Position limits can cause issues for commodity futures-based ETPs if the desired allocation to a given commodity is greater than the limit. This is one of the reasons that fees on many commodity ETPs are slightly higher than equity ETPs because even the most successful commodity ETPs can’t achieve the scale and size of some of the larger equity ETFs due to position limits.
The result of reaching a position limit can be that an ETP issuer has to suspend creates, which can cause a fund’s market price to trade above its net asset value. When and if the fund is able to allow creates again, the market price can then converge back to net asset value and investors that purchased over NAV may sustain losses.