Gunzberg: Commodities To Upstage Stocks

March 11, 2014 But diversification is key, right?

Gunzberg: Yes. What I think is interesting about diversification is that there are more well-diversified options out there, like the Dow Jones UBS, which is more equally weighted across the index, so its basket is more diversified, and has historically a higher risk-adjusted return.

But when you combine commodities as an asset class with stocks and bonds, it’s the S&P GSCI that has lower correlation to stocks and bonds, because so many times, when stocks are suffering, there’s a high oil price.

So you get more diversification in the portfolio context when mixing commodities with other asset classes from an energy-heavy index. But as a stand-alone investment, the Dow Jones UBS has more diversification. One of the best-performing ETFs year-to-date (the First Trust Global Tactical Commodity Strategy (FTGC)) is an actively managed commodities strategy. Does it make sense to opt for active management in commodities?

Gunzberg: There are places for each of them depending on the risk tolerance of the investor. Generally, a combination of the two is most efficient. Commodities have underperformed equities for six straight years. And many investors tend to gravitate to the undervalued, underperforming asset class when it’s already too late. Do you worry investors might miss this opportunity?

Gunzberg: What we’ve noticed in the last number of years, even through the worst years in commodities—like the drawdown of 2008 and 2009—is that assets tracking the indices have remained stable.

We hear that commodities are a part of a strategic or a longer-term allocation for diversification purposes, inflation protection and the potential of equitylike risk and returns.

But I do see that now there’s an opportunity for a kind of static allocation to really start adding some value. There may be some extra value added, whether it’s through alpha—like active strategies that you were looking at—or beta strategies that are opportunistic.

I don’t think there’s a fear investors will miss it, per se. I think most investors are in the institutional space in commodities, so they’ll start looking for alternatives to equities, since equities have had a number of good years. Any other thoughts?

Gunzberg: This is really a special time with these factors coming together at the same time, like the fear of inflation, rising interest rates, the fall in correlations, the cycle switch between stocks and commodities, and the fact that backwardation is back.

We haven’t seen backwardation for 10 years. The last time we saw a big switch from contango to backwardation, there was a 212 percent return in the index. So I think these things coming together at the same time is what makes this period interesting for commodities.


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