- Commodities make up 7.5% of the All Seasons Portfolio
- Commodities do well in environments with higher economic growth and rising inflation
- Invesco Bloomberg Commodity UCITS ETF have low fees (0.19%) and give you access to diversified exposure to 23 different commodity futures
- I receive no remuneration from Invesco or its affiliates in writing this blog post
Let’s take a slight break from the normal routine, shall we? Up until now, I have only posted on this blog once per month with my monthly updates. In those updates, I have included some additional flavor on different investment related subjects, such as tips to invest your pay raise in March or about why you as an European should consider investing in America back in April.
Today, I want to have a slightly different approach. Rather than combining this post with a monthly update, I will do a deep dive in certain aspects of my portfolio, in its own article. This way, it will be easier to truly focus on one subject, while hopefully maintaining your attention.
My portfolio currently consists of 10 different ETFs (November 2019). When I am done building my portfolio, it will be composed by up to 23 different ETFs according to my plan. However, let us today dive in a bit deeper into one of these ETFs that I intend shall have an approximate share of 7.5% of the portfolio value in the All Seasons Portfolio, namely Invesco Bloomberg Commodities UCITS ETF.
Why include Commodities in your All Seasons Portfolio?
Commodities have a natural part of the All Seasons Portfolio, and should, according to Ray Dalio and the followers of this strategy, compose 7.5% of the portfolio. These assets are rather volatile and thus bring certain amounts of risk to a portfolio, why the split is kept rather low.
Investing in commodities mainly provides a protection against inflation. If price levels increase, commonly, the prices of most commodities increase as well. Commodities are therefore a hedge against a lower buying power of a currency.
Commodities also perform well in an economic growth environment. If industrial companies need to output more products to meed the demand, they also need to purchase more base materials.
Let us now take a step back. What are commodities?
A commodity is a basic good that is used in commerce, which is interchangeable against another unit of the same commodity type (see Investopedia for a more detailed description). For example, if you own 1 tonne of copper, it would be the same to you if you keep that unit of copper, or if you sell it and buy another tonne from somewhere else, and the copper will look more or less the same, regardless of from which produced you have acquired it. So often, commodities are used as input in manufacturing.
A few examples of what kinds of products are know as commodities are oil, natural gas, iron, copper, aluminium, nickel, silver, gold, but also foodstuff like soybeans, sugar, coffee, wheat and live cattle.
About the Invesco Bloomberg Commodity UCITS ETF
Let us talk a little bit about the Invesco Bloomberg Commodity UCITS ETF (ISIN: IE00BD6FTQ80). I have chosen to include this in my portfolio as the Commodity component as it ticks these important boxes:
- It is available in Europe
- It has low management fee (0.19%)
- It provides access to 23 different commodities (list included further down)
- Invesco founded in 1935 and is a major and well renowned investment management company with about USD 900 billion in Assets Under Management
Read more on Morningstar and Invesco’s website
This ETF is a so-called synthetic ETF (as opposed to a physical ETF). This means that the ETF tracks the index by way of owning futures and derivatives, rather than the asset itself (e.g. stocks, bonds, etc.). I usually try to avoid such ETFs when investing, as I would then be exposed to additional counter party risk if the issuer of a derivative instrument would default. But, when it comes to commodities, it is fine, as it is extremely difficult and expensive, to physically hold the commodities. That would basically mean that the portfolio manager would need to own a heap of coffee beans or a live cow in a vault somewhere – not really viable and not too kind to the cow.
When I chose the Invesco Bloomberg Commodity UCITS ETF, I did much research on Morningstar on different Commodity ETFs and found that most funds available in Europe weren’t exposed to the commodities themselves, but rather the stocks of the companies producing the commodities. This really didn’t fit my purpose, as I would then get additional company related risk on top of the price volatility of commodities.
On the minus side, there is a bit too much gold for my taste (about 13.5%), considering that I already invest in a Gold ETF separately. I will therefore need to keep this in mind when rebalancing my gold exposures.
I would also have wanted exposure to less common commodities, like Uranium or Rare Earths, but as they would have increased both risk and volatility drastically, I am fine with having the exposure as it is with the most common commodities.
Components in Invesco Bloomberg Commodities UCITS ETF as at 30 October 2019
It is useful to dig into what commodities you actually are exposed to when you invest. The price movements of the underlying commodity futures are what is driving the total value of the ETF. I have retrieved this list from Invesco’s ETF site as at 30 October 2019 with the weights of the portfolio.
| Full name | Weight |
| COMEX GOLD COMMODITY FUTURE Dec 2019 | 13,69% |
| NYMEX LIGHT SWEET CRUDE OIL (WTI) ENERGY COMMODITY FUTURE Nov 2019 | 8,31% |
| ICE EUROPE BRENT CRUDE COMMODITY FUTURE Jan 2020 | 7,34% |
| HG COPPER Dec2019 | 7,01% |
| NYMEX HENRY HUB NATURAL GAS ENERGY COMMODITY FUTURE Nov 2019 | 6,62% |
| CBOT CORN COMPOSITE COMMODITY FUTURE Dec 2019 | 5,86% |
| CBOT SOYBEAN COMMODITY FUTURE Nov 2019 | 5,79% |
| COMEX SILVER COMMODITY FUTURE Dec 2019 | 4,11% |
| LME NICKEL COMMODITY FUTURE Nov 2019 | 4,08% |
| LME RING AND INTER ALUMINIUM COMMODITY FUTURE Nov 2019 | 3,95% |
| CME LIVE CATTLE COMMODITY FUTURE Dec 2019 | 3,59% |
| CBOT SOYBEAN MEAL COMMODITY FUTURE Dec 2019 | 3,15% |
| CBOT SOYBEAN OIL COMMODITY FUTURE Dec 2019 | 3,10% |
| ICE-US SUGAR NO. 11 FUTURES COMMODITY FUTURE Mar 2020 | 3,08% |
| LME ZINC COMMODITY FUTURE Nov 2019 | 3,02% |
| CBOT WHEAT COMMODITY FUTURE Dec 2019 | 2,95% |
| ICE EUROPE LOW SULPHUR GASOIL ENERGY FUTURE Nov 2019 | 2,77% |
| NYMEX RBOB GASOLINE ENERGY COMMODITY FUTURE Nov 2019 | 2,60% |
| ICE COFFEE Dec2019 | 2,39% |
| NYMEX HARBOR NO 2 HEATING OIL ENERGY COMMODITY FUTURE Nov 2019 | 2,27% |
| CME LEAN HOGS COMMODITY FUTURE Dec 2019 | 2,12% |
| ICE-US COTTON NO. 2 FUTURES COMMODITY Dec 2019 | 1,16% |
| CBOT RED WHEAT COMMODITY FUTURE Dec2019 | 1,05% |
As you see from this table, after gold, there is plenty of exposure towards oil (WTI and Brent), several metals, such as copper, silver and nickel, as well as foodstuff as soybeans, coffee, wheat, and livestock.
You would be able to find similar futures yourself and combining them into your own basket of commodity exposure. That is however quite time consuming and potentially not as cost efficient with trading fees. Therefore, in my humble opinion, this ETF does the trick and provides you with access to a broader range of commodities.
These deep dives are a new concept that I am trying out, do you like it? Have you found another Commodity tracking ETF that does the trick just as well? Let me know in the comment section below.
Read more about the Invesco Bloomberg Commodity UCITS ETF on Morningstar and Invesco’s website
Sincerely,
Nicholas
(The contents of this blog post are only my opinions and experiences and may not be interpreted as financial advice)
In case you missed it: Portfolio Update October 2019
hi nicholas
i read in this article said, a better modification of all seasons portfolio (ASP) will be using utilities other than commodities, and this guy did the analysis shows that the utility is outperforming commodity in ASP.
https://www.optimizedportfolio.com/all-weather-portfolio/
whats your take on that?
thanks.
regards,
shu
Hi Shu,
Thanks for the good and very relevant comments.
I have a few issues with the take on the utility vs. commodities, actually.
Most importantly, the comparison the author is for the period 2006-2019. This is a rather short period, and as coincidence has it(?), the author chose a period just when commodities had a bad decade in the 2010s due to the extremely deflationary environment. Hence, any conclusions from this period are rather useless, as it does not portray a market regime where commodities would shine. In such environments, you do not need to own commodities nor utility companies at all if you make such shallow analysis, as stocks would do. That is, however, a quite bad take, as you would need to analyze an environment that is harmful to stocks, but beneficial for assets that thrive in inflationary periods.
So, let’s just have a quick look at what has happened AFTER 2019. I did a quick comparison between the US listed ETFs XLU (utility companies) and DJP (which tracks the Bloomberg Commodity Index):
As you can see, over all periods in the past 3 years (a more inflationary period than anything we’ve seen in the past decade), broad commodities outperform utility companies. The delta this year alone is more than 25 percentage points, as the Bloomberg Commodity Index has risen by 18.6% in two months, while XLU has lost -8.4%.
Hence, I do not agree with the analysis that utilities are better than commodities for hedging against inflation, as has become extremely clear now when we finally have inflation. The take in that article was very typical of a period when we had not seen any meaningful inflation in over a decade, and it shows a lack of appreciation for what an inflationary regime can bring with it. If the analysis would have covered relevant periods that this part of a portfolio is meant to protect, rather than trying to increase returns in a disinflationary environment, then there might have been some credit to the analysis of OptimizedPortfolio.com, but the reasoning there is unfortunately flawed.