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Articles on GCC

  • GCC Leads Broad Based Commodity ETFs

    05/10/2011

    Investing is a major concern especially for those for whom retirement is the next step in their lives. Every investor has their own concept of investing; some are investing for long term and some are investing for a shorter term. We review ETF’s in a number of major asset classes to provide insight into building a long term investment portfolio that can bring the best risk adjusted returns even in the light of uncertain circumstances.

     

    Despite the recent selloff, 2011 be an important year for commodities. Due to the Fed’s approach, the dollar will continue to drop which, in turn, makes owning a commodity an attractive investment. The commodities markets are classified into three major categories i.e.

    ·         Food items

    ·         Base metal and precious metal.

    ·         Energy related commodities

    The combination of slower growth in U.S. service industries and fewer German manufacturing orders helped drive the Standard & Poor’s GSCI Index of 24 commodities down 11 percent last week, the most since December 2008, and erased all the gains since mid-March.

     Despite this, the recent growth in commodity markets is due to the following factors:

     ·         More demand: The world population grew from 2.5 billion in 1950 to 6.7 billion by the end of 2010. The phenomenal growth in the population cause the agriculture related product demand to increase and this is not going to change

    ·         Dollar lower: There has been a systematic devaluation of dollar by the FED over the last 2 years

     

    Commodities of the asset class table with excellent return of 39.21% in the last one year. The second position goes to US small cap growth with a return of 31.51%. Although the one year returns are good, the five year returns are not good.

     

    The broad-based commodities table are as follows:

     

    Description

    Symbol

    1 Yr

    3 Yr

    5 Yr

    Avg. Volume(K)

    1 Yr Sharpe

    GreenHaven Continuous Commodity

    GCC

    35.08%

    -0.26%

    NA

    252

    213.18%

    iPath DJ-UBS Commodity Index Tracker

    DJP

    25.12%

    -9.47%

    NA

    449

    138.13%

    iShares S&P GSCI Commodity-Index

    GSG

    18.14%

    -19.3%

    NA

    671

    91.86%

    ELEMENTS Rogers Intl Commodity

    RJI

    28.59%

    -9.45%

    NA

    706

    150.16%

    PowerShares DB Commodity Index

    DBC

    24.89%

    -9.57%

    3.48%

    2,363

    128.67%

     

    GCC clearly turned out to the winner with the annual return of 35.08% RJI take the second position followed by DJP from a volume perspective (high liquidity and low trading friction) DBC shows the best consistent performance over the year showing fair returns in terms in term of five year of around 6.47%.

    The GCC portfolio has wide sector wise division such as Agriculture, Agriculture life stocks, Agriculture Grains, energy and metals.  The sector division of investment provides an excellent hedge against various market outcomes. All the metals have rallied in the last 2 years and the energy price is also high giving the fund value an additional boost. GCC has an average annual return of 25.19%, the average volumes are low in relation to the other ETF’s but the reason is that the fund is newly established and it will likely grow. The expense to ratio is 0.85%.

     

    The broad based commodities fund provides an effective hedge in periods of recession and rising inflation. World growth is expected to double by the end of the 2030 and we need an increasing food supply and energy to accommodate this. In the light of this, the prospects of the broad based commodity are very bright.

     

    Exchange Tickers: (NYSE: GCC), (NYSE: DJP), (NYSE: GSG), (NYSE: RJI), (NYSE: DBC)

     

    Symbols: GCC, DJP, GSG, RJI, DBC


    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.

     

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  • Japan Disaster -- Prevention is Better Than Cure -- How Does that Apply to Investing?

    04/07/2011

    Japan will take many years to reuild the physical and psychological damage caused by the triple disaster that struck them. Who could have known? There is a very important lesson that can easily be overlooked in the rush to stop radioactive leaks and start to rebuild. Like New Orleans where the levies were known to be a problem area, Japan's nuclear reactors were living on borrowed time, having had their life extended -- just another year. The temptation to delay is very seductive until disaster strikes.

    For years, we have put off retirement investments for -- just another year. Many now face and ugly repair crisis as portfolios have been blighted by the financial melt-down and they are left with a hole. The good news is that there are actions you can and must take to repair the damage and make the most of the time you have left.

    Asset allocation is critical in determining risk adjusted returns from your portfolio.To make this clear, we use SIB -- Simpler Is Better -- to show the potential difference in returns between the portfolios with different numbers of asset classes.

    Each of the SIBs are built from one ETF per asset class.

    Asset Class Ticker Name
    LARGE BLEND VTI Vanguard Total Stock Market ETF
    Foreign Large Blend VEU Vanguard FTSE All-World ex-US ETF
    DIVERSIFIED EMERGING MKTS VWO Vanguard Emerging Markets Stock ETF
    REAL ESTATE VNQ Vanguard REIT Index ETF
    COMMODITIES BROAD BASKET DBC PowerShares DB Commodity Idx Trking Fund
    Intermediate-Term Bond BND Vanguard Total Bond Market ETF

    So the three asset SIB has (VTI), or (SPY), (VEU) or (EFA) and (BND) or (AGG). The four asset SIB adds emerging markets (EEM) or (VWO). The five asset SIB adds Real Estate (RWR) or (VNQ). The six asset SIB adds commodities (DBC) or (GCC). These are index funds, we are not attempting to pick the best fund for each asset class but to make sure we have each asset class covered.

    The three asset portfolio is old school. The world comprises the US and the rest.

    Four asset classes add emerging markets which provides an equities asset class that behaves differently from US and international.

    Five asset classes provides real estate trusts which moves away from equities and provides an asset that delivers dividends and is uncorrelated.

    Six asset classes provides commodities which is a great hedge against inflation and also times of international stress when equities can drop sharply.

    Let's now look at five year returns for each portfolio and what that would mean if these returns were applied over a decade in terms of additional money in your portfolio.

     

     


    Unfortunately, most portfolios in retirement plans only support three asset classes. In a study of over 800 mainly retirement plans, we noted that the majority of plans supported only three asset classes which is going to have a significant impact on the potential returns for the participant.


    How can you leverage the benefits of six asset classes if your plan only supports three asset classes? If you have an IRA, overweight the missing asset class (or more) in the IRA to compensate and create a more balanced portfolio that can deliver higher returns and lower risk.

    Prevention is better than cure, which we all know. Just don't leave it -- one more year -- until you get started.


    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.

    Symbols:SSPY, VTI, EFA, VEU, AGG, BND, CIU, BIV, GWL, PFA, IVV, IYY, IWV, VV, DLN, RSP, SCHX, EEM, VWO, GMM, PXH, DEM, SCHE, DBC, GCC

    Exchange Tickers: (SPY), (VTI), (EFA), (VEU), (AGG), (BND), (CIU), (BIV), (GWL), (PFA), (IVV), (IYY), (IWV), (VV), (DLN), (RSP), (SCHX), (EEM), (VWO), (GMM), (PXH), (DEM), (SCHE), (DBC), (GCC)



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  • Tactically Manage An Income Producing Portfolio With Commodity Exposure

    03/25/2011

    Coming out of the great recession, governments around the world have adopted  loose monetary policies to prop up the economies. These include U.S. central bank's QE2 (Quantitative Easing act 2) and Euro Zone's bailout of troubling peripheral countries like Greece. The current natural disasters in Japan and other countries can only add more demand for the stimulus. These policies resulted in commodity hoarding, especially in material hungry emerging economies such as China. 

    It is critical to have anti-inflation anti-currency devaluation component. In this article, we explore the feasibility of adding commodity exposure to an income producing portfolio. Commodity ETFs are effective tools to cope with the current situations. In a portfolio that is designed to preserve capital for retirement needs. However, because of volatile and somewhat dangerous nature of commodites, one needs to actively manage such a portfolio by adopting tactical asset allocation strategies. 

    Income producing ETFs such as high yield stock ETFs and bond ETFs can be used to build a lower risk portfolio for retirement income producing purpose. We study the two plans: one is without commodity exposure and the other one with the exposure. 

    Retirement Income ETFs with Commodities plan is an extension to Retirement Income ETFs: adding extra commodity asset class with PowerShares DB Commodity Index (DBC) and GreenHaven Continuous Commodity (GCC). This plan consists of 37 funds. These funds enable investors to gain exposure to 6 major assets: US Equity, Commodity, Foreign Equity, Emerging Market Equity, REITs, Fixed Income. Compared with Retirement Income ETFs, this plan has two additional ETFs that represent the extra commodity asset class.  

    The following is the list of the candidate ETFs in the Retirement Income ETFs with Commodities

     

    The list of minor asset classes covered by Retirement Income ETFs with Commodities
    Commodities Broad Basket: DBC, GCC
    Diversified Emerging Mkts: EEM, VWO, DEM
    Emerging Markets Bond: EMB, PCY
    Foreign Large Value: PID, IDV
    Global Real Estate: RWX
    High Yield Bond: HYG
    Inflation-protected Bond: TIP
    Intermediate Government: IEI
    Intermediate-term Bond: CIU, CORP, MBB
    Large Blend: VIG
    Large Value: DVY, SDY, VYM, FVD
    Long Government: IEF, TLT
    Long-term Bond: LQD, VCLT
    Mid-cap Value: PEY
    Miscellaneous Sector: PFF
    Muni National Long: MUB
    Muni Short: SHM
    Real Estate: IYR, ICF, VNQ
    Short Government: SHY
    Short-term Bond: CSJ, VCSH
    World Bond: BWX, WIP 

     

    As of Mar 24, 2011, Retirement Income ETFs with Commodities investment choice is rated as and Retirement Income ETFs investment choice is rated as 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:

     

    The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). 

    Performance chart (as of Mar 24, 2011)

    Performance table (as of Mar 24, 2011)

    Discussions:

    1. Commodity ETFs are volatile. In fact, PowerShare DB Commodity Index ETF (DBC) lost 32% in 2008 while iShares S&P GSCI Commodity Index (GSG) lost a whopping 46% in the same year. 

    2. Simply adding commodity ETFs to a strategic asset allocation portfolio (buy and hold with regular rebalancing) did not improve the returns in the past five years. This is again due to the big loss incurred in commodtiy ETFs. 

    3. Adding commodity ETFs as fund candidates in a tactical asset allocation portfolio, however, can improve returns. In the past five years, Retirement Income ETFs with Commodities Tactical Asset Allocation Moderate had extra 1% annualized return over Retirement Income ETFs Tactical Asset Allocation Moderate

    In conclusions. commodity ETFs are effective tools to cope with the current situations. In a portfolio that is designed to preserve capital for retirement needs. However, because of volatile and somewhat dangerous nature of commodites, one needs to actively manage such a portfolio by adopting tactical asset allocation strategies. 


    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.

    Symbols:DBC,GCC,GSG,EEM,VWO,DEM,EMB,PCY,PID,IDV,RWX,HYG,TIP,WIP,IEI,CIU,CORP,MBB,VIG, DVY,SDY,VYM,FVD,IEF,TLT,LQD,VCLT,PEY,PFF,MUB,SHM,IYR,ICF,VNQ,SHY,CSJ,VCSH,BWX,

    Exchange Tickers: (DBC),(GCC),(GSG),(EEM),(VWO),(DEM),(EMB),(PCY),(PID),(IDV),(RWX),(HYG),(TIP),(WIP),(IEI),(CIU),(CORP),(MBB),(VIG),(DVY),(SDY),(VYM),(FVD),(IEF),(TLT),(LQD),(VCLT),(PEY),(PFF),(MUB),(SHM),(IYR),( ICF),(VNQ),(SHY),(CSJ),(VCSH),(BWX)

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  • What Do Japan and Libya Tell Us About Retirement Investing?

    03/17/2011

    The events of recent days reveal the connected nature of the world in which we live. Twenty years ago, Japan was part of the mysterious far east and now we share their disaster minute by minute and are moved by their courage and the tragedy. 

    We also observe how startling events of nature, along with man-made events in North Africa and the Middle East have put a significant damper on the financial markets and a dagger of fear can pierce our hopes for a sustained rally and the recovery of our hopes for a secure retirement. Just as the Japanese preparedness has been tested to breaking point, incidents and unexpected changes in direction test the preparedness of our financial planning and investing strategy. It is one thing to have a backup in case it rains but who really would have thought that a triple disaster would strike

    In that light, we are looking to build an investment portfolio that will provide downside protection and upside growth to deal with the slings and arrows of outrageous fortune. We have seen that diversifying from three to six asset classes doubled your investments in a decade based on historical simulations of a simple six asset class benchmark. Subsequent to that, we have been adding more funds to each of the asset classes to determine if, and by how much, adding additional funds will provide additional returns.

    We have already reviewed what adding more funds to fixed income, US Equties and REIT has made. In this article we add commodities and then review all the work we have done to date and draw some conclusions before we add the last two classes.

    In the original benchmark, we had (NYSE: DBC) as the commodity ETF. The main reason for this is that it is one of the oldest commodity ETF's that will provide the best history. If we review the alternatives with an eye to the future as well as the past, we should look at how they have performed recently.

    Description Symbol 1 Yr 3 Yr 5 Yr Avg. Volume(K) 1 Yr Sharpe
    GreenHaven Continuous Commodity GCC 36.84% -0.63% NA 193 247.99%
    ELEMENTS Rogers Intl Commodity RJI 28.08% -8.14% NA 596 137.27%
    iPath DJ-UBS Commodity Index Tracker DJP 23.05% -9.31% NA 461 135.02%
    PowerShares DB Commodity Index DBC 24.64% -8.02% 6.6% 2,249 127.44%
    iShares S&P GSCI Commodity-Index GSG 16.76% -15.92% NA 639 77.14%


    We note that DBC is the only choice with five years of history. We also note that GreenHaven has the best 1 and 3 year returns and so would be a natural pick. I am have decided to stay with DBC so that we have the historical perspective when we run simulation.

    When we look at this, we would expect that the addition of GCC will be of benefit to the strategic asset allocation as it provides a better choice in the three and one year timeframe. The benefit to the tactical asset allocation will be more in the one year timeframe as the strategy would likely have preferred fixed income or cash in the three year timeframe.

    SAA(Moderate) Performance Comparison of Plans

    Plan Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Six Core Asset ETF Benchmark(Moderate) 10% 113% 4% 17% 6% 32%
    Six Core Asset ETF Benchmark With PTTRX(Moderate) 11% 111% 5% 23% 7% 37%
    Six Core Asset ETF Benchmark With PTTRX-3USETFs(Moderate) 10% 109% 6% 26% 7% 38%
    Six Core Asset ETF Benchmark With PTTRX-3USETfs-2REIT(Moderate) 10% 113% 5% 23% 7% 35%
    Six Core Asset ETF Benchmark With PTTRX-3US-2REIT-2COMM(Moderate) 11% 86% 5% 21% 7% 30%

     

    We can see that the results are not monotonic. You can see that there is a "drift" towards higher historical returns with more funds but you can't bank on it. Remember that the strategy rotates funds in based on their price performance and this is not always correct. It often is, but not always. The more funds you have, the more decisions the strategy is making. When you have a large number of funds, the strategy will be right more often than not, but when you only have a few, the times when it isn't right are more noticeable.

    The key point is that having the ability to rotate funds can help when circumstances favor a particular sub-class, you just can't guarantee that you will make the right choice all the time. However, you will have more choices when you want to be defensive and find a safer harbor for your funds.

    TAA(Moderate) Performance Comparison of Plans

    Plan Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Six Core Asset ETF Benchmark(Moderate) 8% 86% 9% 65% 12% 88%
    Six Core Asset ETF Benchmark With PTTRX(Moderate) 8% 90% 10% 78% 13% 97%
    Six Core Asset ETF Benchmark With PTTRX-3USETFs(Moderate) 7% 84% 10% 75% 13% 96%
    Six Core Asset ETF Benchmark With PTTRX-3USETfs-2REIT(Moderate) 7% 80% 10% 74% 13% 96%
    Six Core Asset ETF Benchmark With PTTRX-3US-2REIT-2COMM(Moderate) 8% 58% 9% 69% 12% 86%

    The behavior here is slightly different. We have previously noted that 2010 was a poor year for tactical asset allocation strategies as no strong trend was established and with more funds, there was more opportunity to swap in and out of funds looking for a trend that never materialized. It is easy to see that with hindsight but, at the time, nobody knew. At this point, it appears that Commodities are on a strong run and that maybe set for some time. On the other hand, there has been a crossing between REIT and US equities for the second asset class to be selected.

    Given that we have looked at the commodities ETFs and we know that GCC has had better 1 year performance and we know that Commodities are currently being deployed, we also know that the final portfolio is unique in having access to that ETF and so there will be an incremental boost to the short term returns.

    Takeawayws
    • There is no magic or free lunch in retirement investing
      • You want to be as diversified in as many asset classes as you can
      • You want to have alternative funds in each asset class in case one of them is performing poorly
      • Additional funds in the asset class does not always result in higher returns
    • Whichever way you look at it, there are upsides and downsides
      • With SAA, you get the maximum benefit in good times but you can see significant downsides in bear markets
      • With TAA you are protected from big downside risk but you will likely miss the start of the upturn and/or and surprises with asset classes performing unexpectedly well
    • Over the longer term, when there are benefits for more funds in each asset class
    • If you want to limit downside, TAA has clear benefits
    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.

    Symbols:VTI,VEU,BND,VNQ,VWO,DBC,PTTDX,RSP,IJJ,VBK,EFA,RWO,RWR,GCC,(NYSEArca,VTI,),(NYSEArca,VEU),(NYSEArca,BND),(NYSEArca,VNQ),(NYSEArca,VWO),(NYSEArca, ,DBC),(MUTF,PTTRX),(MUTF,PTTDX),(NYSE,RSP),(NYSE,VBK),(NYSE,IJJ),(NYSE,EFA),(NYSE,RWR),(NYSE,RWO),(NYSE,GCC) ,

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