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A Convincing Commodities Strategy

March 13, 2018 2:05 pm
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Commodities are receiving increased attention among market observers this year, but not all exchange traded products (ETPs) offering exposure to the asset class are similar. Standard exchange traded funds (ETFs) featuring commodities exposure are long a basket of commodities.

That strategy is beneficial from a diversification standpoint, but it can diminish exposure to the best-performing commodities in the basket while not being able to avoid some laggards. The Direxion Auspice Broad Commodity Strategy ETF (NYSE:COM) employs a different methodology.

“The Direxion Auspice Broad Commodity Strategy ETF allows investors to take advantage of rising commodity prices, in addition to mitigate risk by going flat (cash) when individual commodities are experiencing downward trends,” according to Direxion. “It seeks to potentially provide commodity investment returns with lower risk characteristics than long-only commodity strategies.”

Dirt Cheap

One of the reasons investors are considering increased commodities allocation is that the asset class is currently inexpensive relative to equities and fixed income assets.

“Commodities are currently the cheapest they have been relative to the S&P 500 within the last 50 years,” according to Direxion research. “The price ratio of GSCI/S&P 500 helps illustrate this point. One can make the case that an investment in Commodities might be timely when considering both where they are currently valued, as well as to their historic averages.”

Commodities barely trailed the S&P 500 in 2016, but that was after a three-year stretch in which the asset class was the worst among U.S. stocks, hedge funds, emerging markets equities, real estate, bonds, managed futures, developed markets stocks and market neutral strategies. Last year, commodities only outperformed managed futures among the aforementioned asset classes.

Inflation, Rates Help

COM, which celebrates its first anniversary later this month, could benefit from an uptick in inflation and rising Treasury yields.

“Commodities have tended to perform better during inflationary periods, and more often than not a rising GDP has coincided with higher U.S. Treasury Yields,” said Direxion. “When looking at US. 10 year Treasury Yields over the last 50 years, roughly 80% of those calendar years Inflation and Treasury Yields have moved in tandem. In other words, when GDP increased in a given calendar year that also represented an increase in Treasury yields.”

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