Amid all the hoopla surrounding the stock market—new records on an almost daily basis—something has been quietly developing in a non-correlated corner. Commodities have been rising off a mid-summer bottom. And not by just a little. The Thomson Reuters/CoreCommodity CRB Index, an equal-weighted benchmark of 17 futures contracts, shot up nearly 19 percent from late June through early November. That’s nearly double the contemporaneous gain in the S&P 500 Index. This has piqued the interest of portfolio builders who’ve been growing more and more concerned about a potential top in the equities market.
Commodities have a long track record as a non-correlated asset, and in the recent past that’s not been a comfort. While stocks have zigged since depths of the Great Recession, commodities have mostly zagged. Put more simply, stocks went up—big time—while commodities tanked.
Witness the WisdomTree Continuous Commodity ETF (NYSE Amex: GCC), an exchange traded fund that tracks the aforementioned CRB Index. Over the past five years, GCC slipped lower by 8.8 percent annually while the S&P 500, proxied by the SPDR S&P 500 ETF (NYSE Arca: SPY), rose at a 14.4 percent pace.
Measured over the 12 months since October 2016, in fact, GCC was still on a downward trajectory. The ETF netted a 1.8 percent loss in the past year, even counting the recent rebound. The question is this: Is the commodity rally a short-lived phenomenon or is it a secular sea change? Are commodities finally ready to cycle higher? There’s a corollary question too. Can active management produce better risk-adjusted returns than a passive long-only stance?
Actively managed commodities funds, more commonly known as “managed futures” funds, differ from commodity index products in a couple of ways. First and foremost is discretion. Instead of slavishly tracking an index, managed futures funds allow the portfolio managers to trade on their ideas in an effort to outdo the passive benchmark. That mandate may include the ability to sell futures short. The beauty about futures trading has always been the ease by which any commodity trend—up or down—can be exploited. Every futures trade, long or short, is margined at the same rate. Ostensibly, that doubles the alpha opportunities for managed futures players, though in reality, downtrends are historically better money makers.
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