Commodity ETFs Help Diversify Traditional Portfolio

Investors who are looking for ways to diversify a traditional investment portfolio can turn to alternative assets like commodities and related exchange traded funds.

“I think the diversification angle is starting to be more of a concern for people,” John Love, President, Chief Executive Officer, USCF, said at the Inside ETFs conference.

“We’re starting to get asked the question more, you know, is this the time to start diversifying more, and so we’re telling people, you know, I think that’s always the case.”

Investors who are interested in broad commodities exposure to diversify a portfolio can look to something like the United States Commodity Index Fund (USCI A-) as a way to gain exposure to the asset class.

USCI eschews rolling front month contracts, which can lead to underperformance, especially in a contangoed market, rebalancing each month and selecting the most-backdated contracts and then the seven highest-returning contracts.

Specifically, the commodities ETF tries to reflect the performance of the SummerHaven Dynamic Commodity Index Total Return Index, which consists of 14 commodity futures. The index is reformulated each month from 27 possible futures contracts. The 14 selected contracts are equally weighted and represent six sectors: Energy (WTI crude oil, Brent crude oil, natural gas, heating oil, gasoil, RBOB gasoline), Precious Metals (gold, silver, platinum), Industrial Metals (aluminum, copper, lead, nickel, tin, zinc), Grains (corn, soybeans, soybean meal, soybean oil, wheat), Livestock (live cattle, feeder cattle, lean hogs) and Softs (coffee, cocoa, cotton, and sugar).

“I think having your portfolio diversified in lots of different asset classes, including commodities, is a smart move,” Love added.

Additionally, many traders have included targeted commodity exposures, such as the United States Oil Fund (USO A), which tracks West Texas Intermediate crude oil futures, for tactical plays to capture short-term moves.