Commodities are the lifeblood of this Web site. And with all the ink—er, electrons—devoted to the analysis of exchange-traded products here, you'd think these newfangled notes and funds had sucked up most of the assets allocated to the commodity space.
You'd be wrong, though. Truth be told, most retail investors are getting their diversification dollop through mutual funds—and rather expensive ones at that.
As of July 23, broad-based commodity funds held more than $30 billion in assets. (This counts only those funds holding futures or futureslike derivatives, not ones holding so-called commodity stocks.) Investors have tucked $21.3 billion into five mutual funds and scattered another $8.9 billion among 15 exchange-traded products.
The asset-weighted average expense borne by investors in commodity mutual funds is 1.34 percent per annum versus the annual cost of holding exchange-traded products at 0.81 percent.
So how do mutual funds justify their higher cost? With better performance? More services? To find the answers, we have to make sure we're comparing apples with apples.
First of all, we have to separate the commodity mutual funds by their management style—passive (or index-tracking) and active.
"Passive" Mutual Fund
|
|
Ticker |
Market Cap ($mm) |
Annual Expense (%) |
YTD (%) |
Volatility (%) |
Sharpe Ratio |
|
Pimco Comm Real Return |
PCRAX |
16,500 |
1.24 |
-8.19 |
17.56 |
-0.47 |
One mutual fund, the Pimco Commodity Real Return Strategy Fund, derives its commodity exposure by replicating, to one degree or another, the returns of an index. Well, in actuality, the managers of the PCRAX portfolio try to outdo the benchmark Dow Jones-UBS Commodity Total Return Index by actively trading the collateral, or the money market instruments that are used to secure the commodity derivatives. You wouldn't be far off the mark in saying only a part of the fund is passively managed.
With $16.5 billion under management, PCRAX is the 800-lb. gorilla of commodity funds. But for all that management, the fund lost 8.19 percent for the year through July 23. The fund also has one of the lowest volatility stats in the commodity fund universe. It's because of that relatively low volatility that the fund's Sharpe ratio is so negative; the fund is punished for not producing more positive returns with its low variance.
Active Mutual Funds
|
|
Ticker |
Market Cap ($mm) |
Annual Expense (%) |
YTD (%) |
Volatility (%) |
Sharpe Ratio |
|
Rydex/SGI Managed Futures |
RYMTX |
2,300 |
1.99 |
-8.94 |
6.66 |
-1.36 |
|
Oppenheimer Comm Strat |
QRAAX |
1,500 |
1.23 |
-7.89 |
21.64 |
-0.37 |
|
Russell Comm Strategies |
RCCSX |
794 |
1.66 |
-2.50 |
12.50 |
-0.21 |
|
Rydex/SGI Long/Short Comm |
RYLBX |
172 |
1.84 |
-5.98 |
19.32 |
-0.32 |
|
Total |
|
4,766 |
|
|
|
|
The other four commodity funds allow their managers free rein within each portfolio's mandate to pursue index-beating strategies. The big funds produced returns fairly close to mark set by the PCRAX portfolio this year. Like PCRAX, the Rydex/SGI Managed Futures portfolio (RYMTX) was penalized with a low Sharpe ratio for the deeply negative return earned with its low volatility.
The Russell Commodity Strategies Fund (RCCSX) was launched in July, so its figures actually represent less than one month of operation. The multistrategy funds' impressive asset build is a testament to the notion that brokered mutual funds are sold rather than bought.
The Oppenheimer Commodity Strategy Total Return Fund allocates its commodity-linked investments based on the weightings of the components in the fund's benchmark, the S&P/GSCI (formerly the Goldman Sachs Commodity Index), though its managers use active strategies within those allocations. The Rydex Long/Short Commodity Fund (RYLBX) pursues a more singular approach, attempting to exploit pricing disparities between related futures and other commodity derivatives. While its returns this year are negative, RYBLX takes "Best of Class" honors for the actively managed commodity mutual funds.
