Wednesday, May 13, 2009

Commodity Diversification

I have updated my commodity ETF and ETN google docs spreadsheet with the latest average daily volume information. Most of these funds have shown increases in volume in the last few months. Feel free to save yourself a copy or download the information to an excel spreadsheet.

If you want to diversify your commodity investments with ETFs and ETNs you have two choices: buy one of the diversified funds or buy multiple specialized funds. I have an issue with most of the diversified funds - they are all too heavily tilted towards energy. For example, take a look at GSG, which tracks the iShares GSCI Commodity index. This fund allocates 71% of its holdings towards energy! I believe that energy is one of the least interesting commodity sectors for investors, so this level of concentration is unacceptable. Why? Because oil had such a screaming bull run until last year that it is less likely to have as much upside as say, gold, which has yet to make a parabolic move in this secular bull market.

So the diversified funds are out. Let's build our own diversified fund based on what commodities we think are going to perform best over the next few years.

Allocation #1 Basic:
SymbolFund Name% Allocation
DBAPowershares Agriculture40%

---Agriculture Total40%
GLDSPDR Gold35%

---Precious Metals Total35%
USOUnited States Oil Fund25%

---Energy Total25%

If you want to keep it simple the basic portfolio will cover most of your bases. DBA is an agriculture ETF consisting of 25% corn, 25% soybeans, 25% sugar and 25% wheat. I believe that agriculture will be the next big commodities winner so that it why it has the highest allocation of the three funds. GLD is the most heavily traded gold ETF in the world. Gold is a must have in these times of economic turmoil. USO is the most heavily traded oil ETF in the world. I only allocate 25% to it because while I believe that oil may have hit already hit its high for this secular bull market.

Portfolio #2 Moderate:
SymbolFund Name% Allocation
DBAPowershares Agriculture40%

---Agriculture Total40%
GLDSPDR Gold25%
SLViShares Silver10%

---Precious Metals Total35%
USOUnited States Oil Fund15%
UNGUnited States Natural Gas Fund10%

---Energy Total25%

The moderate portfolio keeps the same percentage allocation among agriculture, precious metals and energy but adds two new funds. SLV is the most heavily traded silver ETF. UNG is the most heavily traded natural gas ETF. These two important commodities add some extra diversification over the basic portfolio.

Portfolio #3 Complex:
SymbolFund Name% Allocation
DBAPowershares Agriculture25%
NIBiPath Cocoa5%
JOiPath Coffee5%

---Agriculture Total35%
GLDSPDR Gold15%
SLViShares Silver10%
PTME-TRACS Platinum5%

---Precious Metals Total30%
USOUnited States Oil Fund15%
UNGUnited States Natural Gas Fund5%

---Energy Total20%
LDiPath Lead5%
JJCiPath Copper5%

---Base Metals Total10%
COWiPath Livestock5%

---Livestock Total5%

The complex portfolio adds several new funds and categories. For agriculture, we now include NIB, the cocoa ETN, and JO, the cleverly named coffee ETN. For precious metals we add PTM, the platinum ETF. In the new base metals category we include LD, the lead ETN, and JJC, the copper ETN. We also added a small allocation to livestock via COW, the wonderfully named livestock ETN.
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