Shop Around for Commodity Funds

There are plenty of people who will tell you not to own any commodities, that they are merely for speculation. That can be true, but, of course, one can speculate with a total market index fund, too. Any product is as speculative as you want to make it.

The broad-based fund from which the new narrower funds were spawned, DJP, has a correlation of 0.22 to the S&P 500. The historical correlations for the eight new subindex funds range from negative 0.23 to positive 0.35. If that can persist going forward that would fit the bill, as far as I am concerned, for an asset with low correlation.

As I mentioned in last week's article, I favor allocating no more than 5% to commodities. There are plenty of well-reasoned studies that make the case for a bigger allocation, but I believe it's too tempting for investors who are new to the space to look at the great returns of the last few years and simply add more exposure -- and potential volatility -- than they can really tolerate. If the commodity boom lasts another 10 years, a 5% weight will still benefit handsomely, but if commodities implode, a small allocation will only result in a performance lag.