1) Bullseye
Highlights
Commodities
S
tocks and bonds, which represent the ownership and debt of a company, are financial instruments or “paper” assets.
Commodities, on the other hand, are considered “real” assets because they are tangible items that can be consumed. For
example, we use oil to heat our homes and to produce gasoline to fuel our cars. And we use agricultural products, such as
corn or cotton, to produce food and clothing. Where financial assets are typically valued at their net present value based on
dividends, earnings or income potential, commodities are often valued by the basic laws of supply and demand.
The perception among many investors is that commodities are always riskier than stocks. As with most investments,
commodities do have inherent risks; some that are unique to the asset class. However, a Yale study of commodity returns
between 1959 and 2004 showed that investor perceptions were inaccurate. This study was re-examined ten years later
and was found to remain accurate. In addition to validating commodities as a necessary asset class, the study found that
commodity futures and stocks have similar historical returns and volatility. The study also showed that the correlation of
commodity returns with stocks and
Commodity Index Construction
bonds is low, especially over longer
Components &
Contracts &
holding periods. The original study
Index
Sector Weights
Weights
Roll Frequency
describes that the diversification
benefits were best when they were
22 Components;
Energy 29.84%
Near-Term:
needed most; when stocks earned
Rebalanced in
Precious Metals 17.02%
Contracts dated
below-average returns due to equity
Bloomberg
January on price
Industrial Metals 15.48%
1-3 months out
Commodity
market. During times of inflation and
% basis; Annual
Grains 23.66%
Index
recessions, commodity returns were
Softs 8.89% weights defined in
Rolled monthly
generally positive, whereas stock and
Livestock 5.12% June by committee
bond returns generally disappointed.
And despite the methods used by many
Energy 63.56%
Near-Term:
24 Components;
indexes, rebalancing commodity futures
Precious Metals 3.59%
S&P Goldman
Contracts dated
Weights based
annually, or not at all (buy and hold),
Industrial Metals 8.79%
Sachs
1-3 months out
on 5 year world
outperformed monthly rebalancing.
Commodities have become increasingly
more popular in recent years as investors
seek additional ways to diversify their
portfolios. This popularity has led
to the creation of several investment
products tied to indexes that offer
access to commodity exposure. But
the construction and calculation
methodology varies widely from one
index to the next.
Commodity
Index
Longview
Extended
Commodity
Index
Grains 11.54%
production,
Softs 4.16%
rebalanced annually
Livestock 8.37%
Energy 25.98%
Precious Metals 24.48%
Industrial Metals 7.49%
Grains 12.32%
Softs 18.30%
Livestock 11.44%
16 Components;
Initially marketweighted; weights
float with maximum
limits
Rolled monthly
Long-Dated:
Contracts dated
15-18 months out
Semi-annual and
annual rolls
Source: Bloomberg as of 12/31/2015
2) Commodity indexes use vastly different
component allocations, investment
methodologies, and rebalancing frequencies
which can lead to large differences in
performance. Some indexes are less diversified
than others and some overweight specific sectors,
such as energy or precious metals. But a well
constructed commodity index can provide an
additional layer of diversification through a better
balance of exposure to noncorrelated components
within the index itself.
Something that separates commodity returns
from those of stocks and bonds is the inherent
return generated from inflation. When the
markets expect inflation, bonds generally drop
in price as interest rates often rise. Many people
would think stock prices could drop as well if the
cost of materials used to create products begins to
rise. Yet a commodity index might be expected to
rise in response to higher prices for raw materials.
This response to inflation expectations actually
provides the rationale for a low correlation
between a commodity index and stocks and
bonds.
The case for including commodities in a portfolio
is simple—exposure to the asset class may help
diversify a portfolio from some unexpected
events. As with any asset class, nobody can
predict with certainty when to put commodities
to work in a portfolio. Therefore, investors
may want to consider commodity exposure
as an ongoing allocation to their portfolio.
Commodities have historically produced returns
that are competitive with equities, but often at
different times. Remember that commodities,
as a stand-alone investment, do have specific
risks that are unique to the asset class. But as a
diversification component, commodities may
also provide long-term benefits due to their
historically low correlation with other asset
classes such as stocks and bonds.
Commodity Index Performance
Bloomberg
Commodity
Index
S&P
GSCI
Longview
Extended
Commodity
Index
Stocks
(S&P 500)
2000
31.84%
49.74%
9.06%
-9.10%
2001
-19.51%
-31.93%
-15.67%
-11.89%
2002
25.91%
32.07%
20.17%
-22.10%
2003
23.93%
20.72%
15.12%
28.68%
2004
9.15%
17.28%
26.04%
10.88%
2005
21.36%
25.55%
41.53%
4.91%
2006
2.07%
-15.09%
11.41%
15.79%
2007
16.23%
32.67%
28.31%
5.49%
2008
-35.65%
-46.49%
-25.36%
-37.00%
2009
18.91%
13.48%
20.20%
26.46%
2010
16.83%
9.03%
24.39%
15.06%
2011
-13.32%
-1.18%
-2.23%
2.11%
2012
-1.06%
0.08%
2.80%
16.00%
2013
-9.52%
-1.22%
-9.65%
32.39%
2014
-17.01%
-33.06%
-15.11%
13.69%
2015
-24.66%
-32.86%
-18.97%
1.38%
3 Years
-17.29%
-23.71%
-14.66%
15.13%
5 Years
-13.47%
-15.18%
-8.98%
12.57%
10 Years
-6.43%
-10.56%
-0.03%
7.31%
Bear Market
8.29%
7.73%
2.53%
-16.09%
Bull Market
15.90%
18.78%
29.50%
17.22%
Financial Crisis
-12.53%
-22.07%
-5.28%
-10.74%
Risk
18.09%
23.77%
17.86%
15.00%
Correlation
0.50
0.50
0.46
1.00
As of 12/31/2015
Apr 2000-Mar 2003
Apr 2003-Mar 2006
Jan 2008-Dec 2009
(10-year)
vs S&P 500 (10-year)
Source: FactSet and Bloomberg as of 12/31/2015
The Bloomberg Commodity Index, S&P GSCI, and Longview Extended Commodity Index are all benchmarks for broad-based
commodity exposure. The S&P 500 Index, shown as a proxy for stock investments, is a widely known broad-based equity index.
Index returns assume reinvestment of all dividends and do not reflect any management fees, transaction costs or expenses.
The indexes are unmanaged and are not available for direct investment. Standard Deviation (Risk) is a statistical measurement
of volatility based on historical returns. Correlation measures how closely two securities’ movements are associated, ranging from
1.0 (highly correlated) to -1.0 (inversely correlated).
Past performance is not indicative of future returns. The information shown herein is for illustrative purposes only and should not be
used as a predictive measure for the future return expectations of any investment. The information is subject to change or revision without
notice, should not be construed as a recommendation of any specific security or investment product, and was prepared without regard for
specific circumstances and objectives of any individual investor. All investments involve risks, including the potential for loss of
principal. Nontraditional and alternative investments may involve additional risks specific to the asset class. Before investing in any financial
product, always read the prospectus and/or offering memorandum for product-specific risks.
AD-032316
