Commodities Funds Add Portfolio Diversity and Risk

Commodities' historical disconnect from stocks and fixed income investments is the very reason some financial planners think they're a good idea, at least for some investors.

"I think for an investor with a larger portfolio, this could be a great addition," says Ted Toal, an Annapolis, Md., financial planner. "Historically, commodities and managed futures have had a negative correlation to stocks and fixed income."

He has put clients into the Pimco Commodity Real Return Fund(PCRIX Quote), in its class D shares.

The Pimco fund, perhaps the best known entry point for average investors who want a piece of the commodities market, invests in a basket of commodity futures and puts the bulk of its money in Treasury Inflation Protected Securities, or TIPS. The fund is up 6.73% for the year to date, according to Morningstar data, easily outperforming the major stock indices.

But Toal and other advisors are also aware that fees now weigh heavily on investor's decisions, and the trading costs of a commodities fund will be high. At 4.95% a year, Refco's index fund is pricier than most mutual funds, to be sure.

The inclusive fee covers licensing costs for the S&P index, maintenance of the accounts linked to the funds and a 2% broker's cost for servicing and sales. A separate share class that charges 2.95% -- but doesn't include the broker's costs -- is also available.

Brian Clarke, head of sales for Refco Alternative Investments in the Americas, says the fund aims for annual returns of 13.5% -- less the fees, that's a targeted return of 8.5%.

While that's well behind the current performance of equity funds linked to major indices, it never hurts to diversify, says Loyd Stegent, a Houston financial planner.

Should interest rates rise and the market rally falter, commodities "would be the only buffer in your portfolio," he says. Current returns in commodities don't hurt either, he adds.