Vanguard Debuts Its First Commodities Fund
The Vanguard Commodity Strategy Fund is a low-cost broad-based commodities fund with a $50,000 minimum investment
Vanguard has launched its first commodities fund, keeping to a debut date that it had announced in April.
The Vanguard Commodity Strategy Fund (VCMDX) is an actively managed low-cost fund that seeks to provide investors both diversification and inflation protection within a balanced portfolio. It invests in commodity-linked derivative investments such as commodity futures and swaps, collateralized by a mix of Treasury bills and short-term Treasury inflation-protected securities (TIPS) and seeks to outperform the Bloomberg Commodity Total Return Index.
(Related: Vanguard Plans First Commodities Fund)
The fund is available only as Admiral Shares, which require a $50,000 minimum investment and has an expense ratio of 0.20%, far below the 1.24% average expense ratio of competing actively managed commodity funds (0.92% median for institutional shares) according to Morningstar.
“Inflation fluctuations are difficult to predict and can have significant impact on both stock and bond market returns. Vanguard believes that a diversified blend of commodity-linked futures and short-term TIPS can provide diversification benefits in the event of unexpected inflation, as commodities returns have historically exhibited low correlation to those of the equity and fixed income markets,” according to the company.
Inflation indicators, however, have been falling. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components increased at a 1.0% annual rate in the first quarter, which was down from a 1.3% increase reported previously, and May core and headline Consumer Price Index increases also came in below expectations at 2% and 1.8%, respectively. In addition oil prices have been slumping.
Vanguard serves as the advisor for the new commodities fund, with oversight by two internal management groups: Vanguard’s Quantitative Equity Group, which has managed the commodities allocation for Vanguard Managed Payout Fund and oversees more than $2 billion in alternative strategies, and Vanguard’s Fixed Income Group, which manages $1.5 trillion in assets, including several TIPS and T-bill portfolios, including the $29.1 billion Vanguard Short-Term Inflation-Protected Securities Index Fund.
The commodities exposure of the Managed Payout Fund, currently $125.8 billion, will be reallocated to the new Vanguard Commodity Strategy Fund.
“It’s nice when a new fund takes in $125 million in new money on Day One. Unfortunately, I don’t think it’s going to improve the performance of Managed Payout, a chronically bad offering. But a 0.20% expense ratio can’t hurt,” writes Daniel Wiener, editor of The Independent Adviser for Vanguard Investors.
The senior portfolio manager of the new Vanguard commodities fund is Josh Barrickman, who heads Fixed Income Indexing Americas. He’s joined by portfolio managers Anatoly Shtekhman, the senior investment strategist in Vanguard Quantitative Equity Group, and portfolio manager Fei Xu, CFA, from the Vanguard Quantitative Equity Group.
— Check out Vanguard Mulling Move Into Private Equity: Report on ThinkAdvisor.