NEW YORK ( ETF Digest) -- Many believe it's important to have portfolio exposure to a basket of commodity ETFs. Why? Commodity markets often feature noncorrelated performance with conventional portfolios. But, this relationship has changed with easy money policies begun in 2008 which, away from most bond markets, has allowed most assets, including commodities, to trend in the same direction, becoming highly correlated. These policies have also have caused a decline in the dollar. Since most commodities are priced in dollars, this puts upward pressure on prices which can become inflationary. As a former CTA (Commodity Trading Advisor) and CPO (Commodity Pool Operator), I know the value of having a portfolio allocation to the commodity sector. These provide increased diversification opportunities for any portfolio. And, in nearly 40 years of seeing these positive effects during a variety of market conditions, I know first-hand their benefits.
While we're ranking these in our own fashion, investors are encouraged to choose the issues that have the best allocations to suit their needs. That said, pay attention to sector allocations, AUM (assets under management) and liquidity. Although we may use some of these in ETF Digest portfolios, it's not our intention to recommend one over another. Whereas our previous technical analysis methodology involved using evaluating monthly charts commodity markets must be viewed over shorter time horizons. This is due to obvious increased volatility but also due to the peculiar nature with which underlying commodity contracts trade. Some futures contracts expire monthly and others quarterly. Some have serious seasonal characteristics inherent with agricultural issues such as with seasons, weather and disease. Therefore, it pays to be active and utilize a combination of weekly and daily charts to manage risk.Four risk factors should be considered:·The CFTC's varying considerations regarding commodity position limits as applied to the assets of ETF and ETNs--still in limbo.·The credit quality of ETNs given these are "notes" many guaranteed by Barclay's and Deutsche Bank remain a consideration if only as an understanding of structure.·Backwardation (back month contracts lower than front month) and Contango (back months higher than front month) can negatively affect contract rollover for investors and alter tracking considerations which upset some investors. ·Since most commodities trade in dollars, the value of the dollar can positively or negatively affect performance. ProShares and Deutsche Bank feature inverse and leveraged long ETFs/ETNs for those investors wishing to hedge or speculate.