The Case Against Commodity ETFs

If you've read my other posts about commodity exchange traded funds (ETFs) you'll know that they make up part of my portfolio. My reasoning behind these holdings is the benefit of diversification offered by returns that are, in theory, uncorrelated to other asset classes. The Economist says this might be bunk.

In the article, Roll Over, The Economist argues that the piling in of investors in to commodities has resulted in prices that are too high to be sustained. They write, "The herd instinct explains why investors are buying commodities several years into a bull run. According to Merrill Lynch, a sign of speculative excess is that the spread between prices of listed commodities (bought by investors) and unlisted products is a record 60%."

The article makes a pretty good argument to step out of commodities. The decision, of course, must remain with the individual investor. For those needing a little good news, consider that the article as acknowledges that, "Apart from Chinese demand, the bulls point to restrictions in supply, caused by years of underinvestment and the time needed to bring new resources into production."

I for one will stick with my plan. Moving in and out of different asset classes can be successfully, but the chances of success are slim. Rather, if there is a dip in commodity prices and my holdings fall below the percentage of my portfolio that I have set, then I will simply buy some more. No emotion in that sort of decision which should hopefully keep me out of trouble.

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