 |
Vanguard ETF: |  |
7.4%* |
|
Diversified Core: | |
8.1%* |
|
Six Core Asset ETFs: | |
7.3%* |
Articles on DBP
- Long Short Commodity and Currency ETFs Can Be Useful to Diversify Your Portfolios
06/21/2011
Recent market volatilities reminded investors that risk is heightened. For a long term retirement investor, diversification among assets is the first step. On the other hand, some long short strategies in alternative asset classes such as commodities and currencies can be used to further tame market fluctuation.
In the recent financial crisis investors took huge hits. During the financial crisis, some smart investors invested in alternative area such as Exchange traded funds (ETF's) that tap into managed-futures strategies popular with hedge funds and commodity-trading advisors. For these investors, they were rewarded as these managed futures based ETFs performed well during that period.
The managed futures strategy is nothing new; hedge funds and other large, sophisticated investors have been using quantitative methodologies to direct futures-based strategies for years.
Let's take a look at some of commodity and currency long short strategy based ETFs:
Description
Symbol
1 Yr
3 Yr
5 Yr
Avg. Volume(K)
1 Yr Sharpe
Elements S&P CTI ETN
11.45%
NA
NA
43
59.01%
iShares Diversified Alternative
3.54%
NA
NA
24
88.78%
WisdomTree Managed Futures
NA
NA
NA
48
NA
For more information on ETFs in various asset classes, please refer to MyPlanIQ ETFs in Asset Classes page.
Clearly the best performer is LSC in the table with the return of 11.43% in a year followed by the ALT with a return of 2.24%. Although the LSC is down from the past week when the returns are 14.43% this is in line with the worldwide corrections in stoks. The expense ratio of LSC is 0.75% which is also the least as compare to the other ETF's. Please find below the May 2011 long/short positioning of the Index sectors as well as the long/short positioning of the prior month.
Sector
Previous Position
Current Position
Weight*
Energy
Long
Long
37.50%
Grains
Short
Long
23.00%
Industrial Metals
Long
Short
10.00%
Precious Metals
Long
Long
10.50%
Livestock
Long
Short
10.00%
Softs (by Commodity)
Cocoa
Short
Long
2.00%
Coffee
Long
Long
3.00%
Cotton
Long
Short
2.00%
Sugar
Short
Short
2.00%
LSC is based on a well known S&P Commodity Trends Indicator - Total Return index. The Index is designed to apply a long/short strategy to six commodity sectors comprised of sixteen traditional, physical commodity futures contracts. The Index is a total return index designed to reflect the performance of a fully collateralized investment in the futures contracts. Readers can compare LSC with MyPlanIQ's P S and P Commodity Trend Indicators Strategy which models the same S&P CTI index using Powershares DB commodity ETFs such as (DBP), (DBB), (DBA) and (DBO).
ALT return on the securities is linked to the performance of portfolio foreign currency forward contract and exchange traded future contracts that may involve commodities, currencies, interest rate and certain eligible stocks or bonds indices while seeking to reduce the risks and volatility inherent in those investment by taking long and short positions in historically co-related assets.
WDTI employs a quantitative, rules-based strategy designed to provide returns that correspond to the performance of the Diversified Trends Indicator (DTI). The index is a composite of 24 highly liquid futures grouped into 14 sectors, with an even split between financials (i.e., currencies and interest rates) and physical commodities. The positions of each sector are either long or short (except for energy) based on price behaviour relative to a moving average (if energy is not positioned long, the sector weight is allocated to other sectors). Sector weights are determined by global production for commodities, and by GDP tiers for financials. Readers again can compare this fund with MyPlanIQ's P S and P Diversified Trend Indicators that, in addition to Powershares commodity ETFs, uses CurrencyShares ETFs such as (FXE), (FXY), (FXA), (FXF), (FXB), (FXC) to model the S&P DTI index.
The actively managed long short ETFs mentioned above can indeed provide some diversification benefits for a retirement investing portfolio. As these ETFs are relatively new, investors should monitor these ETFs and do their due diligence.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
Symbols: LSC, ALT, WDTI, DBO, DBP, DBA, DBB, FXE, FXY, FXA, Portfolio Strategies, Managed Future ETFs
- Gold is Cool
04/21/2011
The evolving global economy, geopolitical risk, growing inflation and sovereign debt are major challenges for any emerging nation as this leads to higher commodities prices. Silver, precious metals and gold have been the best performing asset classes in recent years outperforming equities, REIT and most asset classes over 3, 5 and 10 year periods.
The performance of silver, gold, and precious metals looks set to continue in the coming months due to bullish fundamentals. The recent consideration of downgrade of credit rating of USA just adds fuel to the fire.
The table below clearly indicates the strength of the commodities with silver, precious metals and gold leading.
Description Symbol 1 Week 4 Weeks 13 Weeks 26 Weeks 52 Weeks Trend Score Silver SLV 4.97% 22.09% 50.83% 76.17% 140.32% 58.88% Precious Metals DBP 1.94% 8.88% 17.68% 20.71% 48.28% 19.5% Energy DBE -2.13% 6.37% 17.49% 34.13% 22.8% 15.73% Commodity DBC -2.35% 4.88% 11.24% 24.98% 28.54% 13.46% Agriculture DBA -1.48% 0.68% 3.64% 18.83% 37.88% 11.91% Gold GLD 0.97% 4.83% 9.31% 8.51% 30.39% 10.8% US Oil USO -3.19% 6.69% 12.31% 23.23% 7.66% 9.34% Base Metals DBB -3.63% 1.27% 0.49% 8.06% 8.06% 2.85% Natural Gas UNG 4.11% -0.86% -9.71% -3.04% -23.29% -6.56% Silver and the gold are major commodities used to hedge against microeconomics, and to reduce the risk of inflation as it provides added potential for significant capital gain. According to Ibbotson Associates, precious metals are the most positively correlated asset class to inflation. From a strategic point of view, Ibbotson determined that portfolios could reduce risks and improve returns with a 7-15% allocation to precious metals.
Many investor uses gold for wealth preservation and silver for a return. Over the next ten year or more, metal prices are predicted to remain high. This is mostly due to increasing demand from countries undergoing intensive levels of development and infrastructure building. In particular China and India will drive the cost of metals across the board. Analyst predicts that 2011 and 2012 will be year of silver we will see higher trend in silver in these years. As long as the systematic devaluation of dollar by the Fed (i.e. interest rates near zero) broad base commodities trends will continue positive. Once interest rates start to increase the dollar will gradually pick up, pushing gold and silver down.
Today, commodities are a long term investment proposition as inflation is a present and continuing reality that will drive commodity prices and stocks higher. Over the past decade the gold and silver were used as a major hedging commodity in microeconomics. Today the continuing high demand over limited supplies and the change of basket of international bank reserves will cause the prices of gold to continue to trend upward.
Symbols: DBC, DBA, DBP, GLD, SLV
Exchange Tickers: (NYSE: DBC), (NYSE: DBA), (NYSE: DBE), (NYSE: DBB), (NYSE: DBP), (NYSE: GLD), (NYSE: SLV), (NYSE: USO), (NYSE: UNG)
Disclaimer:
MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
- Schwab Mutual Funds Beat out ETFs
04/06/2011
l
Retirement investing is a "hair on fire" problem -- especially for baby boomers for whom retirement is a near and present danger. There is a real lack of consistent, unbiased information that a retiree can use to help improve risk adjusted returns. Blogger Jenny Hollingworth has been teaching herself about investing and has come to the point where she is going to choose a plan and make her first investments.
In her recent post New Steps she sorted through a list of alternatives and chose the Schwab OneSource Select List Funds.
The reason for her choice was:
- The highest possible rating for each plan is 5 stars. So I bypassed anything that didn’t have 5 (because really, why go for less?)
- Picked out a name I knew: Schwab. Specifically: Schwab OneSource Select List Funds. I selected it.
- This is an application to Charles Schwab's OneSource Select List mutual funds. These funds are No Load and No Transaction Fee (NTF) mutual funds. Based on Schwab's policy, the no load NTF funds have 90 days redemption fee period. As of 1/1/2010, there are total 140 OneSource Select List funds available from Schwab.
We are going to review the Schwab OneSource Select List Funds to see whether she chose a good plan. The plan consists of 137 funds. These funds enable participants to gain exposure to 6 major assets: US Equity, Commodity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.
Asset Class Ticker Name LARGE VALUE AAGPX American Beacon Lg Cap Value Inv Foreign Large Value AAIPX American Beacon Intl Equity Inv Retirement Income AANPX American Beacon Retire Inc & Apprec Inv High Yield Muni ABHYX American Century High-Yield Muni Inv Inflation-Protected Bond ACITX American Century Infl-Adj Bond Inv Muni National Long ACLVX American Century Long-Term Tax-Free Inv MID-CAP VALUE ACMVX American Century Mid Cap Value Inv Conservative Allocation AONIX American Century One Choice: Vry Cnsrv I MID-CAP VALUE ARDEX Aston/River Road Dividend All Cap Val N Target Date 2011-2015 ARFIX American Century LIVESTRONG 2015 Inv Retirement Income ARTOX American Century LIVESTRONG Inc Inv Target Date 2021-2025 ARWIX American Century LIVESTRONG 2025 Inv Target Date 2031-2035 ARYIX American Century LIVESTRONG 2035 Inv SMALL VALUE AVPAX American Beacon Small Cp Val Inv EUROPE STOCK AXEAX Threadneedle European Equity A Muni National Interm BMBSX Baird Intermediate Muni Bd Inv Technology BOGSX Black Oak Emerging Technology Small Growth BSCFX Baron Small Cap Moderate Allocation BUFBX Buffalo Balanced Technology BUFTX Buffalo Science & Technology DIVERSIFIED EMERGING MKTS CEMVX Causeway Emerging Markets Investor MID-CAP BLEND CHTTX Aston/Optimum Mid Cap N Intermediate Government CPTNX American Century Government Bond Inv Small Growth CSMVX Century Small Cap Select Inv REAL ESTATE CSRSX Cohen & Steers Realty Shares Long-Short CVSIX Calamos Market Neutral Income A SMALL BLEND DISSX Dreyfus Small Cap Stock Index Bank Loan EABLX Eaton Vance Floating Rate Adv Conservative Allocation EXDAX Manning & Napier Pro-Blend Cnsrv Term S Foreign Large Blend EXWAX Manning & Napier World Opportunities A Moderate Allocation FAGSX First American Strat Growth Allc A Financial FBRSX FBR Small Cap Financial ULTRASHORT BOND FEUGX Federated Adjustable Rate Secs Instl Intermediate Government FICMX Federated Income Instl Muni National Interm FIMTX Federated Intermediate Municipal Instl LARGE BLEND FMIHX FMI Large Cap Long-Short FMLSX Wasatch-1st Source Long/Short SHORT GOVERNMENT FSGVX Federated US Govt 1-3 Yr Instl Muni Short FSHIX Federated Shrt-Interm Dur Muni Instl Short-Term Bond FSTIX Federated Short-Term Income Instl Intermediate-Term Bond FTRFX Federated Total Return Bond Instl Svc SMALL BLEND GABSX Gabelli Small Cap Growth AAA Communications GABTX GAMCO Global Telecommunications AAA LARGE GROWTH HCAIX Harbor Capital Appreciation Inv Foreign Large Blend HIINX Harbor International Inv WORLD STOCK HLMGX Harding Loevner Global Equity Advisor Foreign Large Growth HLMNX Harding Loevner International Equity Inv Equity Energy ICENX ICON Energy S China Region ICHKX Guinness Atkinson China & Hong Kong LARGE VALUE INDZX RiverSource Diversified Equity Inc A Moderate Allocation JABAX Janus Balanced T Health JAGLX Janus Global Life Sciences T LARGE GROWTH JAMRX Janus Research T Small Growth JATTX Janus Triton T Foreign Large Blend JETAX Artio International Equity II A Target Date 2021-2025 JNSAX JPMorgan SmartRetirement 2025 A LARGE BLEND JRMSX INTECH Risk-Managed Core T Target Date 2011-2015 JSFAX JPMorgan SmartRetirement 2015 A Target Date 2026-2030 JSMAX JPMorgan SmartRetirement 2030 A Target Date 2016-2020 JTTAX JPMorgan SmartRetirement 2020 A LARGE BLEND JUEAX JPMorgan US Equity A LARGE VALUE JVLAX JHancock3 Disciplined Value A Small Growth KGSCX Kalmar Growth-with-Value Small Cap LARGE GROWTH LGILX Laudus Growth Investors US Large Cap Gr WORLD BOND LIFNX Laudus Mondrian Intl Fixed Income Foreign Large Blend LISOX Lazard Intl Strategic Equity Open Multisector Bond LSBRX Loomis Sayles Bond Retail DIVERSIFIED PACIFIC/ASIA MAPIX Matthews Asia Pacific Equity Income PACIFIC/ASIA EX-JAPAN STK MAPTX Matthews Pacific Tiger Investor China Region MCHFX Matthews China Investor Muni National Interm MITFX Marshall Intermediate Tax-Free Inv JAPAN STOCK MJFOX Matthews Japan Investor Foreign Large Blend MKIEX McKee International Equity Instl DIVERSIFIED PACIFIC/ASIA MPACX Matthews Asia Pacific Investor High Yield Bond MWHYX Metropolitan West High Yield Bond M Short-Term Bond MWLDX Metropolitan West Low Duration Bond M Intermediate-Term Bond MWTRX Metropolitan West Total Return Bond M MID-CAP BLEND NMMCX Northern Multi-Manager Mid Cap SMALL VALUE NOSGX Northern Small Cap Value Muni National Long NOTEX Northern Tax-Exempt Small Growth NSPAX ING Small Cap Opportunities A Foreign Small/Mid Value OAKEX Oakmark International Small Cap I WORLD STOCK OAKGX Oakmark Global I COMMODITIES BROAD BASKET PCRDX PIMCO Commodity Real Ret Strat D Emerging Markets Bond PEMDX PIMCO Emerging Markets Bond D LARGE BLEND PEOPX Dreyfus S&P 500 Index WORLD BOND PFODX PIMCO Foreign Bond (USD-Hedged) D Intermediate-Term Bond PGBOX JPMorgan Core Bond A Multisector Bond PONDX PIMCO Income D LARGE BLEND PRBLX Parnassus Equity Income - Inv Inflation-Protected Bond PRRDX PIMCO Real Return D SMALL VALUE PSOAX JPMorgan Small Cap Value A Intermediate-Term Bond PTTDX PIMCO Total Return D SMALL BLEND RYTFX Royce Total Return Svc Intermediate-Term Bond SAMIX RidgeWorth Intermediate Bond I Foreign Large Blend SICNX Schwab International Core Equity Inst Foreign Large Blend SIEIX RidgeWorth Intl Equity Index I ULTRASHORT BOND SIGVX RidgeWorth US Gov Sec Ultra-Short Bd I Target Date 2031-2035 SRJAX JPMorgan SmartRetirement 2035 A DIVERSIFIED EMERGING MKTS SSEMX SSgA Emerging Markets Instl High Yield Bond STHTX RidgeWorth High Income I Muni National Interm STTBX RidgeWorth Investment Grade T/E Bond I LARGE BLEND SWANX Schwab Core Equity Inv Global Real Estate SWASX Schwab Global Real Estate Select Target Date 2026-2030 SWDRX Schwab Target 2030 LARGE VALUE SWDSX Schwab Dividend Equity Financial SWFFX Schwab Financial Services Target Date 2011-2015 SWGRX Schwab Target 2015 Intermediate Government SWGSX Schwab GNMA Long-Short SWHEX Schwab Hedged Equity Health SWHFX Schwab Health Care Target Date 2021-2025 SWHRX Schwab Target 2025 Intermediate-Term Bond SWIIX Schwab Premier Income Instl Foreign Large Blend SWISX Schwab International Index Retirement Income SWKRX Schwab Monthly Income Enh Payout Retirement Income SWLRX Schwab Monthly Income Max Payout LARGE GROWTH SWLSX Schwab Large-Cap Growth Foreign Large Growth SWMIX Laudus International MarketMasters Sel Small Growth SWMSX Laudus Small-Cap MarketMasters Select Muni National Interm SWNTX Schwab Tax-Free Bond Moderate Allocation SWOBX Schwab Balanced Inv LARGE BLEND SWPPX Schwab S&P 500 Index SMALL BLEND SWSSX Schwab Small Cap Index LARGE GROWTH TGCNX TCW Select Equities N Mid-Cap Growth TGDNX TCW Growth Equities N EQUITY PRECIOUS METALS TGLDX Tocqueville Gold LARGE BLEND TICRX TIAA-CREF Social Choice Eq Retail LARGE GROWTH TIRTX TIAA-CREF Large-Cap Growth Retail LARGE GROWTH TWCGX American Century Growth Inv Muni National Interm TWTIX American Century Interm-T Tx-Fr Bd Inv SHORT GOVERNMENT TWUSX American Century Short-Term Govt Inv LARGE VALUE TWVLX American Century Value Inv Foreign Large Value TWWDX Thomas White International Foreign Large Growth UMBWX Scout International SMALL VALUE VSFAX Federated Clover Small Value A Mid-Cap Growth WTMGX Westcore MIDCO Growth LARGE VALUE YAFFX Yacktman Focused Asset Class Number of funds Balanced Fund 21 REITs 2 Fixed Income 34 Commodity 1 Sector Fund 9 Foreign Equity 18 Emerging Market Equity 7 US Equity 41 Other 4 Total 137
As of Apr 5, 2011, this plan investment choice is rated as above average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are . It has the following detailed ratings:Diversification -- Rated as great (98%)
Fund Quality -- Rated as average (54%)
Portfolio Building -- Rated as great (86%)
Overall Rating: above average (80%)Portfolio Discussions
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 6 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:
US Equity: SPY or VTI
Commodity: DBC
Foreign Equity: EFA or VEU
REITs: IYR or VNQ or ICF
Emerging Market Equity: EEM or VWO
Fixed Income: AGG or BND
Performance chart (as of Apr 5, 2011)Performance table (as of Apr 5, 2011)
Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe Schwab OneSource Select List Funds Tactical Asset Allocation Moderate 13% 106% 10% 91% 13% 110% Schwab OneSource Select List Funds Strategic Asset Allocation Moderate 12% 152% 4% 32% 7% 52% Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate 10% 81% 9% 82% 13% 89% Six Core Asset ETF Benchmark Strategic Asset Allocation Moderate 14% 121% 4% 20% 7% 34% With six asset classes and a wide number of funds, the returns beat the six asset class benchmark. With high scores in all categories, this plan delivers portfolios that have produced strong historical returns.
Symbols: SPY, VTI, EFA, VEU, EEM, VWO, IYR, VNQ, ICF, AGG, BND, DBC, HYG, JNK, PHB, AOM, AOK, CIU, BIV, ITM, MUB, TFI, PZA, MLN, IYH, IXJ, VHT, XBI, PBE, DBR, RYH, EFG, IXP, PTE, DGG, LTL, MTK, PTF, DBT, RYT, ROM, GWL, PFA, IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV, SCZ, EFV, PID, DWM, IYF, VFH, IPF, PFI, DRF, RYF, IFGL, RWX, TZE, TZG, TZI, TZO, TZL, IGOV, BWX, WIP, IVV, IYY, IWV, VV, DLN, RSP, SCHX, IOO, VT, SHY, SHV, VGSH, PLK, USY, IEV, VGK, PEF, DEB, IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG, IJJ, IWS, JKI, VOE, EMV, PWP, RFV, UVU, IJH, IWR, JKG, VO, MDY, EMM, PJG, DON, EZM, MVV, IJS, IWN, JKL, VBR, DSV, PWY, RZV, UVT, IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA, UWM, SCHA, GMM, PXH, DEM, SCHE, GBF, LAG, PCY, CSJ, BSV, VCSH, ITE, IXC, IPW, DBE, RYE, DKA, IEI, VGIT, IJK, IWP, VOT, EMG, PWJ, RFG, UKW, IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK, TIP, DBP, EPP, VPL, GMF, PAF, AAXJ, DND, EWJ, JPP, PJO, DXJ, GSG, BIL
Disclosure:
MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
Originally from the UK, Jenny Hollingworth lives with her husband and two sons in Northern California. She is a wife, mother, writer, theatre director, coffee drinker, avid reader, keen walker, movie watcher, Jane Austen lover and observer of life, in no particular order. MyPlanIQ has no formal relationship with Jenny Hollingworth.
- Commodities Withstood the Recent Market Selloff
03/21/2011
Commodity ETFs again showed their divergence with other risk assets last week: during the market selloff last week. The broadbase commodity index like Powershares commodity index (DBC) actually registered a 0.78% gain. Natural gas (UNG) had a big jump, gaining 6.83% while gold (GLD) was steady. Silver had the biggest drop of 2.17%. Fore more detailed performance, please refer to here.
From the following trend score table, one can see the broadbase commodity index (DBC) actually had its trend score increased in last week.
The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).Assets Class Symbols 03/18
Trend
Score03/11
Trend
ScoreDirection Silver SLV 40.11% 47.09% v Energy DBE 16.53% 14.75% ^ Commodity DBC 14.15% 12.94% ^ Precious Metals DBP 14.15% 15.87% v Agriculture DBA 12.09% 14.21% v US Oil USO 10.34% 8.1% ^ Gold GLD 8.86% 9.46% v Base Metals DBB 6.53% 4.5% ^ Natural Gas UNG -5.95% -13.75% ^ Amid the somewhat severe and volatile market correction last week, it is relevant to review several commodity themes again here:
- Agriculture commodities (DBA): world food price has risen in the past several years and the demand from emerging middle classes outstripped the supply. See Commodities Trends: Food Prices Rose More Than Normal CPIs for more analysis.
- Precious metals (gold, silver) (DBP): governments around the globe pumped money to stimulate the economy, let alone the quantitative easing 1-2 by the U.S. central bank would surely make paper currencies less valuable and thus precious metals (Gold and Silver) become the defacto hard currencies. We also pointed out that Silver plays dual roles (as a proxy to hard currency and a proxy to general industrial activities being a metal of practical use).
- Energy (Oil (USO) or natural gas (UNG)) (DBE): Amid the middle east political unrests and recent Libyan's upheaval (Libya has the ninth largest oil reserve in the world), oil production is in danger of sudden disruption.
- Broadbase commodities (DBC) (GSG): Along with the mentioned factors, recent natural disaster in Japan, the third largest economy in the world, will only add more government supported stimulus, commodity hoarding will only get worse.
- Commodity Investing: Long/Short (S&P Commodity Trend Indicators) vs. Long-Only
- Commodity ETFs: Does Everyone Need Energy in Their Portfolio?
- Energy Commodities and Gold ETFs Are Strong: Gold's Role in Asset Allocation?
- Correction in Commodities: The Role of Volatile Commodities in Asset Allocation
- Gold and Silver Corrected, Agriculture Commodities Strong
Symbols: SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,SPY,QQQQ,IWM,MDY,EFA,VEU,EEM,VWO,IYR,ICF,VNQ,GSG,LQD,CSJ,CIU,HYG,JNK,PHB,TLT,IEF,SHY,SHV,BND,AGG,MUB,MBB ,
Exchange Symbols: (NASDAQ: SLV), (NASDAQ: DBP), (NASDAQ: GLD), (NASDAQ: DBB), (NASDAQ: DBA), (NASDAQ: DBC), (NASDAQ: DBE), (NASDAQ: USO), (NASDAQ: UNG), (NASDAQ: SPY), (NASDAQ: QQQQ), (NASDAQ: IWM), (NASDAQ: MDY), (NASDAQ: EFA), (NASDAQ: VEU), (NASDAQ: EEM), (NASDAQ: VWO), (NASDAQ: IYR), (NASDAQ: ICF), (NASDAQ: VNQ), (NASDAQ: GSG), (NASDAQ: LQD), (NASDAQ: CSJ), (NASDAQ: CIU), (NASDAQ: HYG), (NASDAQ: JNK), (NASDAQ: PHB), (NASDAQ: TLT), (NASDAQ: IEF), (NASDAQ: SHY), (NASDAQ: SHV), (NASDAQ: BND), (NASDAQ: AGG), (NASDAQ: MUB), (NASDAQ: MBB)Disclosure:
MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
- Commodity Investing: Long Short (S&P Commodity Trend Indicators) vs. Long Only
03/13/2011
Last week's market volatility is a good reminder on how precarious it is in commodity investing. For the week, broadbase commodity index ETF (DBC) dropped 3.09% while Gold (GLD) fared better, dropping only 0.81%. Agriculture commodity (DBA) dropped even more: 3.71%. For more detailed information, please refer to here.
It is now generally recognized that adding commodity exposure in a long term portfolio that adopts a strategic asset allocation strategy can increase diversification effect and thus possibly improving risk adjusted returns. However, given the high volatitily (and risk) of commodities, it is important for an investor to understand the difference between a long only approach and long short approach in this asset investment.
A long only approach is simply just buying a commodity index such as Powershares DB Commodity Index ETF (DBC) or GSCI commodity index (GSG) (or sub index such as agriculture (DBA), precious metal (DBP)). A long short approach, on the other hand, can take long and/or short positions on mutliple commodity components simultaneously. It is mostly based on technical indicators such as moving averages, momentums and reversals. This approach has been adopted by professional CTAs (Commodity Trading Advisors). A simple and popular strategy is the S&P Diversified Commodity Trend Indicators. The following is a short description of the strategy:
The strategy is a simplified variation of S&P commodity trends indicator (CTI). It is a subset of the S&P DTI by simply eliminating half of the financial assets.1.The original asset allocation
Energy 37.5%
Powershares DB Energy (DBE)
Industrial metal 10%
Powershares DB Base Metal (DBB)
Precious metal 10.5%
Powershares DB Precious Metal (DBP)
Agriculture 42%
Powershares DB Agriculture (DBA)
2. Position determination
The monthly percentage change of a sector’s price is compared to past monthly price changes exponentially weighted to give greatest weight to the most recent return and least weight to the return seven months prior.
The weights are as follows:
NUMBER OF MONTHS
WEIGHT
7
2.32%
6
3.71%
5
5.94%
4
9.51%
3
15.22%
2
24.34%
1
38.95%
3. Monthly rebalancing
The portfolio is rebalanced monthly by setting every sector to their original percentage and do the position determination again.
For more information, please refer to "Standard and Poor's Commodity Trend Indicator" document.The following table compares the performance between such S&P Commodity Trend Indicators Portfolio (S&PCTI) and a general broadbase commodity ETF (DBC):
Portfolio
Last 3 Years
Last 1 Years
2007
2008
2009
2010
2011
AR(%)
S&PCTI
5.049
14.884
15.939
23.768
2.282
3.186
5.148
AR(%)
DBC
-8.826
25.383
31.579
-31.799
16.187
10.154
7.695
Sharpe Ratio(%)
S&PCTI
29.127
113.142
91.832
107.569
14.048
23.723
39.12
Sharpe Ratio(%)
DBC
-20.516
150.174
160.984
-97.51
58.736
52.501
415.108
Standard Deviation(%)
S&PCTI
16.389
13.074
16.719
21.232
15.572
13.045
13.119
Standard Deviation(%)
DBC
27.914
18.435
17.728
34.962
27.397
19.578
15.275
Though S&PCTI under performed in 2009, 2010 and 2011, it out performed DBC in the last 3 years. This is because it had 23.8% return in 2008, compared with DBC's 31.6% loss in the same year. Furthermore, S&PCTI has a standard deviation 16%, compared with DBC's 28%. In fact, S&PCTI's standard deviation is consistent with that of an overall stock market index such as S&P 500 (SPY).
It is perhaps even more important to pay attention to maximum drawdowns for S&PCTI: since its inception 10/1/2007 (this is due to the short histories of commodity ETFs used in this portfolio), the maximum drawdown is about 19% vs. DBC's whopping 60% (during the 2008-2009 detacle).
The takeaway from this article is that for active investors, one might want to consider adopting a more conservative approach in commodity exposures. Investors can find Element's ETN (LSC) or Direxion's Commodity Trend Strategy Inv (DXCTX) that implement the S&P Commodity Trend Indicators strategy. Before you invest, however, you are encouraged to compare the portfolio S&PCTI, LSC and DXCTX.In the follow up articles, we wil further compare how the long only and long short strategies can be used in strategic and tactical asset allocation portfolios.
Symbols:SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,SPY,
Symbols (exchange): (NYSE:SLV), (NYSE:DBP), (NYSE:GLD), (NYSE:DBB), (NYSE:DBA), (NYSE:DBC), (NYSE:DBE), (NYSE:USO), (NYSE:UNG), (NYSE:SPY)Disclosure:
MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical - Commodity ETFs: Does Everyone Need Energy Investment?
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