If you listen to Jimmy Rogers, you might think that the U.S. as we know it will cease to exist. While I do not share this opinion, I think there is value in understanding what he means and exploring some of the investment themes he believes are important.
Rogers has lent his name to a new line of exchange-traded notes from a company called Elements that slice and dice various commodities indices into easily accessible investment products.
There are four funds:
Elements Linked to Rogers International Commodity Index Total Return
Elements Linked to Rogers International Commodity Index Agriculture Total Return
Elements Linked to Rogers International Commodity Index Energy Total Return
Elements Linked to Rogers International Commodity Index Metals Total Return
. All were launched earlier this month.
The total return index is the broadest exchange-traded product that invests in commodities I have seen to date. It allocates 44% of assets to energy, spread across six different products; 34.90% to 20 agricultural products including barley and greasy wool; and lastly 21.10% to metals. Interestingly gold has a smaller weight than aluminum or copper.
According to data from the Elements
Web site, the index underlying RJI has dramatically outperformed the Dow Jones AIG Commodity Index by over 6% annualized for the last five years. iShares has an ETN that tracks the Dow Jones AIG that trades under ticker DJP.
The three other funds are each tied to one of the three big components of RJI -- agriculture, energy and metals.
The agriculture index has been the laggard of the three, averaging 5% per year over five years compared with over 20% for the broader Total Return Index. Over the same period the energy index has averaged 26% a year and the metals component has averaged 32% a year. If you have been following these markets over the last few years, these performance numbers will not surprise you, but you probably realize they don't matter either.
That fact that the agriculture fund has lagged means nothing. It could lead or lag in the future. There is not an active or even a quasi-active strategy being employed, as there is with some equity ETFs. These funds simply offer a different static exposure that may or may not be better than funds from other companies with different mixes.
If you believe in owning the agriculture space you have three products to choose from: RJA, the
PowerShares DB Agriculture ETF
or the brand new
iPath DJ-AIG Agriculture Total Return Sub-Index
DBA is the narrowest product with four commodities, JJA has seven commodities and, as mentioned, RJA has 20. Assuming you decide you want any exposure at all, the next decision becomes how to best own the space. Bigger bets on four products with DBA will appeal to some people who feel like they understand these markets well. Conversely some people will not want to make such isolated bets but will simply want broad exposure for asset allocation purposes.
One little nugget I think I am noticing in comparing RJA to JJA (yeah, the symbols are easy to mix up) is that JJA has a larger weighting to coffee than RJA.
has had middling success trying to open stores in China, where obviously more people drink tea.
If, and this is a big "if," Starbucks can actually have success in China converting a measurable portion of China's 1.3 billion people into coffee drinkers, that could mean very good things for the price of coffee and give a long-term advantage to JJA.
You can take the same type of look at the metals and energy area, too. There are single-product funds from several providers and other broader funds too. The selection process needs to be a blend of what you know, or are willing to learn, and what you are trying to add to your portfolio. Obviously, the narrower you go the more risk you take.
You will read differing opinions about how much exposure you should have to commodities. The range seems to be between 0% and 20%, and there are reasonable arguments for both extremes. I, for one, believe in having exposure but I think it should be moderate.
Commodities are volatile and historically have a low correlation to equities. The reason I want exposure to commodities is to own something that zigs when the stock market zags. I don't want to make a big bet within this asset class. That leads me to believe a 5% weighting is about right, but you need to dance to your own beat on this.
Lastly, some nuts and bolts about these funds. They are exchange-traded notes, not exchange-traded funds. They do not own the underlying commodities, they are structured as debt instruments set to mature in 2022 and the implied promise is that their price movements will correspond with indices they mimic.
They will not pay interest and will have an annual expense ratio of 75 basis points. As these are debt instruments, they rely on the parent company
Swedish Export Credit Corp's
ability to pay.
At the time of publication, Nusbaum was long DBA, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
to send him an email.