I Am Looking Into a Commodities Fund

I am thinking about buying shares in a commodity fund. I am looking at the iShares Commodities Select Strategy ETF.

I was inspired to look at this fund after an episode of one of the podcasts I listen to called The Index Investing Show with Ron DeLegge. He also runs a couple of other sites: Portfolio Report Card and ETF Guide.

Ron DeLegge thinks everyone’s portfolio should have three parts to it. The first is the Margin of Safety. This is money that does not lose value and that you cannot afford to lose. He never calls it an FDIC-insured savings account, but that is what it sounds like. The second is your Core Portfolio, which should be at least 51% of your portfolio. It should be in low-cost index ETFs covering all the major asset classes: Stocks (domestic and international), bonds (domestic, international, government, corporate), commodities, real estate and cash. Whether the Margin of Safety can count as the cash part is a bit unclear to me, but I think it should be cash in your brokerage account. The final part is the Non-Core Portfolio. This can be individual stocks, futures, day trading, currencies, venture capital and private equity, or a fund that only covers part of the commodity sector.

He liks to criticize Jim Cramer, but that is similar to what Cramer says: You should put most of your money in indexes and only play with any “Mad Money” left over. At least, that is what I got out of his books [Note 1].

Ron also does Portfolio Report Cards. He grades people on risk (whether your portfolio’s risk level matches your self-description), cost, taxes, performance and diversification. He judges diversification based on whether or not you have split your portfolio into the three sections above, and if your Core Portfolio has all the major asset classes covered.

One thing that he has noticed is that a lot of people have no or too little exposure to commodities, and he says he does not understand why this is. I cannot speak for all investors, but I can tell you why I have not had any commodity exposure until now.

One reason is that a lot of commodity funds do not pay dividends. If a stock or fund does not pay, then I do not play.

Another reason is that a lot of commodity funds send a K-1 for tax purposes. I do not want to deal with a K-1. 1099s are just simpler. I know MLPs are going out of style, but I have read that if your have income above a certain threshold from an MLP in a Roth IRA, you could still pay taxes on it. I think that is true of any partnership and anything that uses a K-1 if the asset is held in a Roth IRA. Partnerships do not pay tax because they just send the profits to the partners. (This is why I do not think the “double taxation” of dividends is a bad thing: Corporations exist to shield their members from liability.) But if an investment in a Roth uses a 1099, then you are in the clear. The ETF that Ron uses as his reference, GCC, violates both of my criteria.

When I sold my stocks and got into ETFs, I put my money into dividend stock ETFs, bond ETFs, and for the first time I got into real estate ETFs. For all three of these, I got both domestic and international ETFs. I also got a utilities ETF for a bit more juice. But all the commodities funds were either K-1 funds or had no payout.

A caller asked about GMOM (Cambria Global Momentum ETF) and Ron recommended GAL, the SPDR SSgA Global Allocation ETF. They are multi-asset funds. I think the caller wanted to be in one fund that could cover the Core Portfolio. I was inspired to look at multi-asset ETFs from the top three issuers (Vanguard, State Street and BlackRock’s iShares). This led me to COMT.

COMT is in all the commodities sectors, it uses a 1099, and it pays a dividend. I am going through the prospectus and reports. I am leaning towards buying it.

I might not get an A if I get a Portfolio Report Card, but Ron DeLegge has influenced my thinking. But he is a bit too crypto-friendly for me. I really do not think crypto will amount to anything. People who hate the government used to be happy just complain and shake their fists at the cloud. Now they use enough electricity to power an entire country.

Ron DeLegge does not really make predictions. Unlike gold bugs and inflation bears, he helps you to prepare for any market scenario.

Note 1: There was a trader who went by the handle Airelon who (if I remember correctly) had a similar idea. He tried a few times to trade, and kept losing everything. Then he came across the idea of trading buckets, and put each bucket into different types of assets, depending on risk. If his riskiest trade lost money, he did not use his “safe” money to bail the bad investment out. He had a podcast for a while, as well as a blog. He was on Seeking Alpha. He left to be part of some company called Sharpe Trade, but the website is gone and the Twitter account was rebooted and is now all crypto. (I think Airelon might have some crypto, but would be skeptical of the “Cryptocurrency will save civilization!!” claims going around.) His YouTube channel is empty, but somehow a few people have preserved them in playlists: Airelon Trading and Psychology – Aileron Trading.  He moved to Mexico and got off of social media. I did have a brief chat with him on Twitter in 2014, but he seems to have disappeared from Twitter. He does have a private Instagram account, but since it’s private, I have no idea when he last posted. He has a Google Plus account with posts up to mid-2016.

Big Jim is looking into commodities because he is a down to earth guy.

“Dormition of the Virgin” by El Greco (1541 – 7 April 1614), at El Greco’s site, assumed allowed under Fair Use.

Share

Post created on 2018-08-17_3:10:59, last modified on 2018-08-24_14:37:31

This site has a disclaimer.

Comments are closed.