What do we think of Enhanced Roll Commodity ETFs, as part of hedge?
Hello again LETFs community!
I'm considering adding a small allocation for:
- iShares Bloomberg Enhanced Roll Yield Commodity Swaps ETF.
(well, technically, I already own it in my speculation pie, and it has done well, but considering it as a part of my main portfolio).
What is it?
Enhanced roll commodity ETF to invest in energy, precious metals, agriculture, industrial metals, softs, and livestock through future contracts. Rather than auto rolling into the next contract, the 'enhanced roll' rules-based process tries to avoid contango (negative roll yield). So it should do better than a more traditional broad commodities ETF.
Arguments for including:
Diversification: In stead of just gold, fundamentally, adding a broader commodities fund adds diversification. Gold, after all, isn't like other commodities, and is a buy & hold monetary & inflation hedge, rather than a production input like oil or industrial metals. We've seen some recent macro events (global conflicts, oil supply shocks) where everything went down, while commodity ETFs went up.
Correlation/beta of BCOM index to:
- Equities: ~0.4
- Gold: ~0.3
- Long-bonds: ~0.0
- CTA MF: ~0.3
Overall, quite low correlations to the above asset classes. Should be good for harvesting rebalancing premia?
Regime hedging: Energy does well during inflationary regimes, especially stagflation and supply-shock. During some recent events (global conflicts, oil supply shocks), there were moments the above 4 asset classes went down, while this commodities ETF went up. So if you're aiming for an 'All-Weather' portfolio, adding 5-10% in broad commodities seems to be solid.
Arguments against:
- Recency bias, as it's in the news. Prices are high now.
- Historically, long-term CAGR is pretty rubbish on broad commodities ETFs. Granted, these are usually standard roll funds. Enhanced roll ETFs are relatively new.
- Swaps counter-party risk.
- Back-testing: tricky. You can put in some broad commodities ETFs, but they basically never increase Sharpe and/or CAGR, unless you really try to, probably due to BCOM-type funds' long-term CAGR being pretty shit.
- 0.4 beta to equities isn't the best. Gold, long-bonds, and managed futures are closer to zero.
My current strategy (UK-based):
- 55% 2x NDX
- 15% Long-bonds (20yr duration Euro Gov)
- 15% DBMF
- 15% Gold
+ rebalance bands
+ 200SMA (using SPY) on 2x NDX.
Considering splitting the 15% gold into 10% gold 5% Enhanced Roll Yield Commodity Swaps. Or 7.5%/7.5%.
Anybody have insight on this?
Thanks guys