This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

New Commodities Fund Brings Sophistication

NEW YORK (TheStreet) -- During the last decade, investors became more aware of the potential diversification benefits of investing in commodities thanks to repeated media appearances by investing legend Jim Rogers and a proliferation of exchange-traded funds offering access that didn't exist previously.

Recently, investing in commodities has fallen out of favor, but managers of the new First Trust Global Tactical Commodity Strategy Fund (FTGC) hope to rekindle interest in the asset class. FTGC is an actively managed fund, and First Trust is seeking to enhance returns compared with the other indexed commodity funds and to reduce volatility.

The fund will own between 10 and 35 different commodities. Commodities will be chosen based on the manager's "expectations for volatility based on historical data." Specific commodities will be chosen based on volatility and their correlation to other commodities. The fund will generally tilt toward lower volatility and low correlation.

Commodity fundamentals will come into play in choosing the specific futures contracts. Successful management of the "roll yield" can be a driver of returns. In the simplest of terms, if one contract expires at $50 and is replaced with a contract that costs $55, then that difference, called contango, will be a drag on returns. That happens in index funds that usually must buy whatever contract the prospectus calls for. The managers have discretion to choose the optimal contract to eliminate or at least minimize the consequence of contango.

For now, the fund owns 13 commodities. In agricultural commodities, the fund is heaviest in coffee at 11.5% of the fund, hogs 9.6% and soybean meal 9.1%. The total agriculture allocation is 50.3%.

Energy commodities make up almost 27% of the fund with West Texas Intermediate Crude being the largest holding in this group at 12.5% of the fund. Precious metals are the third group with a surprisingly small 17.1% weight in the fund.

Even more surprising is that silver is the largest holding in the metals tranche with a 7.4% weighting. Silver is typically much more volatile than gold. Silver, though, has a lower correlation to the other commodities than gold does, making it a better fit in the fund.

After a fantastic multiyear run into the financial crisis, commodities have generally floundered. The longstanding Power Shares DB Commodity Index Tracking Fund (DBC) is a good proxy for broad-based, indexed commodity investing. It started trading in early 2006 and rocketed to an 89% gain in just two years. DBC is down 43% from that high-water mark. It has generally traded in a narrow channel since bottoming out in 2009.

The overall strategy of investing in commodities is sophisticated and relies on a lot of moving parts coming together cohesively. Commodities do play a role in a diversified portfolio and FTGC could be the answer, but given the complexity, it would be reasonable for investors to give the fund a few months to build a track record before investing.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,047.17 +68.04 0.40%
S&P 500 1,990.78 +4.27 0.21%
NASDAQ 4,524.5080 -1.9740 -0.04%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs