Vanguard Announces Plans to Launch Commodities Fund

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by pokebowl » Sat Apr 06, 2019 10:22 am

I'll let other more adventurous forum members dip their toes into this first. I currently place commodities on the same shelf as crytocurrencies. Backed by nothing but pure speculation.
Nullius in verba.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by Rick Ferri » Sat Apr 06, 2019 10:27 am

It was bound to happen eventually because Vanguard investors are going elsewhere to invest in higher-cost commodity funds. Vanguard is all about offering low-cost alternatives to their investors. They did the same thing with international bond funds and factor funds.

This is not an endorsement of those strategies.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by gtwhitegold » Sat Apr 06, 2019 7:13 pm

Phineas J. Whoopee wrote:
Fri Apr 05, 2019 3:08 pm
gtwhitegold wrote:
Fri Apr 05, 2019 2:47 pm
I don't see why there is so much hate for this fund.

Personally, I'm not going to invest in it when it becomes available, but I will consider it at a later time.

I also agree with Day9 in how it should be implemented in a portfolio. Too bad that it includes short term bonds and not intermediate or long term bonds to increase diversification.
You call people neither wishing nor advocating to buy a particular fund hate?

PJW
Maybe hate is a strong word, but if you are going to dismiss something without giving a reason, it seems pretty useless to me. Examples of such posts are below.
Kenkat wrote:
Thu Apr 04, 2019 12:25 pm
Will this now become the preferred choice over PCRIX - Pimco Commodities Real Return - for those of us foolish enough to still own these things?
animule wrote:
Thu Apr 04, 2019 2:11 pm
Drawing a line in the sand on this one.

If they eventually add this to their retirement date funds (which seems likely given past experience), I will be dumping those funds and moving to something else that is less prone to tinkering.

Vanguard has proven to have an itch to keep changing these target date funds and not leave well enough alone. I'm not sure that the last big move to bump up international and also add international bonds has really panned out all that well.
Crushtheturtle wrote:
Fri Apr 05, 2019 1:05 pm
"You can fondle Vanguard's Commodities fund, but it will not respond." - Warren Buffett, probably
Reasoning behind such statements would be helpful.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by gtwhitegold » Sat Apr 06, 2019 7:20 pm

robertmcd wrote:
Fri Apr 05, 2019 3:49 pm
gtwhitegold wrote:
Fri Apr 05, 2019 2:47 pm
I don't see why there is so much hate for this fund.

Personally, I'm not going to invest in it when it becomes available, but I will consider it at a later time.

I also agree with Day9 in how it should be implemented in a portfolio. Too bad that it includes short term bonds and not intermediate or long term bonds to increase diversification.
Well I think it should be used solely in a diversified portfolio as a hedge against inflation, so in my opinion it should hold tips/t bill/floating rate notes since your intermediate/long term treasury bonds cover you for deflation.
I was specifically talking about longer term TIPS. If I remember correctly, PIMCO and others use long term TIPS in their CCF funds.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by Trader Joe » Sat Apr 06, 2019 7:26 pm

MFInvestor wrote:
Thu Apr 04, 2019 9:31 am
Vanguard Announces Plans to Launch Commodities Fund

https://www.prnewswire.com/news-release ... 24779.html

Where have you gone, Jack Bogle
A nation turns its lonely eyes to you

VALLEY FORGE, Pa., April 4, 2019 /PRNewswire/ -- Vanguard today filed a preliminary registration statement with the Securities and Exchange Commission for Vanguard Commodity Strategy Fund. The new actively-managed fund, which is expected to launch in June 2019, will offer investors added portfolio diversification, along with a potential hedge against inflation risk by investing primarily in commodities and treasury inflation protected securities (TIPS).

"The Commodity Strategy Fund will be a low-cost, broad-based option for advisors and institutional investors seeking additional diversification and inflation protection for a well-balanced portfolio," said Matt Brancato, head of Vanguard's Portfolio Review Department. "We believe the commodity exposure can serve as an effective inflation hedge and also provide value in mitigating stock and bond risks."

Vanguard's new fund will bring a low-cost entrant to the commodity category, which has an average expense ratio of 1.25%.1 The fund will solely offer Admiral Shares at a $50,000 investment minimum, with an estimated expense ratio of 0.20%—less than a sixth of the cost of competing broad-based commodity-linked funds.
Let us know how your investment in this fund works out. Personally I only invest in the Vanguard S&P 500 (VFIAX).

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by gtwhitegold » Sat Apr 06, 2019 7:31 pm

grok87 wrote:
Sat Apr 06, 2019 7:59 am
Interesting.

For those interested here is a link to the monthly bloomberg reports on the commodity index Vanguard will be benchmarking against
https://data.bloomberglp.com/promo/site ... utlook.pdf
from page 18 commodities are still in contango of -3.6% and that has gotten worse over the past year (a year ago the contango was -3.3%)

i may have some interest if things swing into backwardation but i'm not expecting that anytime soon.

more discussion here
viewtopic.php?t=243986

cheers,
grok
Same here. My concern is that it will never happen (or happen so infrequently that the little bit of backwardation they have are useless.)

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by Kenkat » Sat Apr 06, 2019 8:10 pm

gtwhitegold wrote:
Sat Apr 06, 2019 7:13 pm
Phineas J. Whoopee wrote:
Fri Apr 05, 2019 3:08 pm
gtwhitegold wrote:
Fri Apr 05, 2019 2:47 pm
I don't see why there is so much hate for this fund.

Personally, I'm not going to invest in it when it becomes available, but I will consider it at a later time.

I also agree with Day9 in how it should be implemented in a portfolio. Too bad that it includes short term bonds and not intermediate or long term bonds to increase diversification.
You call people neither wishing nor advocating to buy a particular fund hate?

PJW

Maybe hate is a strong word, but if you are going to dismiss something without giving a reason, it seems pretty useless to me. Examples of such posts are below.
Kenkat wrote:
Thu Apr 04, 2019 12:25 pm
Will this now become the preferred choice over PCRIX - Pimco Commodities Real Return - for those of us foolish enough to still own these things?
animule wrote:
Thu Apr 04, 2019 2:11 pm
Drawing a line in the sand on this one.

If they eventually add this to their retirement date funds (which seems likely given past experience), I will be dumping those funds and moving to something else that is less prone to tinkering.

Vanguard has proven to have an itch to keep changing these target date funds and not leave well enough alone. I'm not sure that the last big move to bump up international and also add international bonds has really panned out all that well.
Crushtheturtle wrote:
Fri Apr 05, 2019 1:05 pm
"You can fondle Vanguard's Commodities fund, but it will not respond." - Warren Buffett, probably
Reasoning behind such statements would be helpful.
My quote above: for those of us foolish enough to still own these things? is just a little sarcasm or self-deprecating humor. I’ve owned PCRIX since 2004 and have even added to it a couple of times. So far, it hasn’t really panned out. Of course, neither has my life insurance policy.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by gtwhitegold » Sat Apr 06, 2019 8:48 pm

Kenkat wrote:
Sat Apr 06, 2019 8:10 pm
gtwhitegold wrote:
Sat Apr 06, 2019 7:13 pm
Phineas J. Whoopee wrote:
Fri Apr 05, 2019 3:08 pm
gtwhitegold wrote:
Fri Apr 05, 2019 2:47 pm
I don't see why there is so much hate for this fund.

Personally, I'm not going to invest in it when it becomes available, but I will consider it at a later time.

I also agree with Day9 in how it should be implemented in a portfolio. Too bad that it includes short term bonds and not intermediate or long term bonds to increase diversification.
You call people neither wishing nor advocating to buy a particular fund hate?

PJW

Maybe hate is a strong word, but if you are going to dismiss something without giving a reason, it seems pretty useless to me. Examples of such posts are below.
Kenkat wrote:
Thu Apr 04, 2019 12:25 pm
Will this now become the preferred choice over PCRIX - Pimco Commodities Real Return - for those of us foolish enough to still own these things?
animule wrote:
Thu Apr 04, 2019 2:11 pm
Drawing a line in the sand on this one.

If they eventually add this to their retirement date funds (which seems likely given past experience), I will be dumping those funds and moving to something else that is less prone to tinkering.

Vanguard has proven to have an itch to keep changing these target date funds and not leave well enough alone. I'm not sure that the last big move to bump up international and also add international bonds has really panned out all that well.
Crushtheturtle wrote:
Fri Apr 05, 2019 1:05 pm
"You can fondle Vanguard's Commodities fund, but it will not respond." - Warren Buffett, probably
Reasoning behind such statements would be helpful.
My quote above: for those of us foolish enough to still own these things? is just a little sarcasm or self-deprecating humor. I’ve owned PCRIX since 2004 and have even added to it a couple of times. So far, it hasn’t really panned out. Of course, neither has my life insurance policy.
I did the same thing with the GREK ETF, so I understand. I'm also under water currently in QSPNX and QMHNX, but I have a little more faith that those two will work in the long run.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by adogandzic » Sun Apr 07, 2019 6:47 am

jhfenton wrote:
Thu Apr 04, 2019 2:05 pm
I will give the fund a look. I've always been intrigued by commodities, but the generally high cost, issues with index construction, managing roll cost/contango, etc. has led me to steer clear. That and the fact that there's not a clear reason to think commodities have an expected positive return.

But there are some commodity ETFs now with ERs in the 25-28 bp range, so cost has come down to a reasonable range. And funds like CMDY/iShares Bloomberg Roll Select Commodity Strategy ETF at 28 bp even claim to try to actively manage roll cost/yield. So I will take another look. I haven't really taken a close look at the performance and construction of the new funds. (CMDY is only a year old. BCI and COMB at 25 bp are about 2 years old. So there's not a long track record for any of these ETFs.)

My assumptions based on the press release is that Vanguard's fund will be managed by the quantitative equity group on a similar theory to CMDY. I doubt they will make big bets on the direction of commodity prices, but they will likely try to eek out a bit of return over a purely passive index using a quantitative strategy.

I'll take a fresh look when the fund opens, but it will probably not be a first day purchase, the way that Vanguard's Emerging Markets Bond Admiral Shares (VEGBX) were 16 months ago or that Vanguard's US Multifactor Admiral Shares (VFMFX) were 14 months ago.
I see that COMB has a distribution yield 0.9%, which is interesting. Where do these come from? I am curious how COMB compares with this new Vanguard commodities fund.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by Rick Ferri » Sun Apr 07, 2019 7:27 am

Eleven years ago, Larry Swedroe and I had a long debate about including commodities in a portfolio. Larry was for included them and I was against it. There are probably a lot of people on this forum who remember this. My reasons have not changed.

The Great Commodities Debate Part 1

The Great Commodities Debate Part 2

Commodities sound good, they just don't work good in a portfolio.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by james22 » Sun Apr 07, 2019 7:55 am

gtwhitegold wrote:
Sat Apr 06, 2019 7:31 pm
grok87 wrote:
Sat Apr 06, 2019 7:59 am
Interesting.

For those interested here is a link to the monthly bloomberg reports on the commodity index Vanguard will be benchmarking against
https://data.bloomberglp.com/promo/site ... utlook.pdf
from page 18 commodities are still in contango of -3.6% and that has gotten worse over the past year (a year ago the contango was -3.3%)

i may have some interest if things swing into backwardation but i'm not expecting that anytime soon.

more discussion here
viewtopic.php?t=243986

cheers,
grok
Same here. My concern is that it will never happen (or happen so infrequently that the little bit of backwardation they have are useless.)
I believe commodities have an insurance role, but do fear financialization means persistent contango.

The second factor we need to consider is that, in forecasting forward-looking return expectations for CCFs, the long-term evidence was backwardation (where futures prices are lower than spot prices) and contango (where futures prices are higher than spot prices) were, on average, a wash, producing neither a significant benefit or cost. Thus, that formed the basis for my assumptions about forward-looking return expectations.

There were two possible explanations for why this did not happen. The first is that financialization led to increased demand—estimated holdings of commodity index-related products have increased from $15 billion in 2003 to over $200 billion in 2008. The second is supply issues.

Either way, the result was large contango for most of the period. The large contango acted as a significant, and unexpected, drag on returns. We also had a collapse in prices, so investors didn't need the insurance hedge they purchased via commodities.



https://finance.yahoo.com/news/swedroe- ... 1J17PTD1fN

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by midareff » Sun Apr 07, 2019 9:13 am

The older and dumber I get the fewer funds I need. There be stocks here, there be bonds there, but NOT as Scotty said, Captain, there be whales here.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by midareff » Sun Apr 07, 2019 9:17 am

Rick Ferri wrote:
Sun Apr 07, 2019 7:27 am
Eleven years ago, Larry Swedroe and I had a long debate about including commodities in a portfolio. Larry was for included them and I was against it. There are probably a lot of people on this forum who remember this. My reasons have not changed.

The Great Commodities Debate Part 1

The Great Commodities Debate Part 2

Commodities sound good, they just don't work good in a portfolio.

Rick Ferri
As I recall Larry stuck with his point that it added value to a portfolio. I have always grappled with the concept of something that under performs the S&P, and is used to replace equities in a portfolio as a risk component, can add value while under performing. MY mental math just can't seem to make that work, rebalancing or none. ... and yes, I do remember that "discussion".

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by jeffyscott » Sun Apr 07, 2019 11:28 am

midareff wrote:
Sun Apr 07, 2019 9:17 am
Rick Ferri wrote:
Sun Apr 07, 2019 7:27 am
Eleven years ago, Larry Swedroe and I had a long debate about including commodities in a portfolio. Larry was for included them and I was against it. There are probably a lot of people on this forum who remember this. My reasons have not changed.

The Great Commodities Debate Part 1

The Great Commodities Debate Part 2

Commodities sound good, they just don't work good in a portfolio.

Rick Ferri
As I recall Larry stuck with his point that it added value to a portfolio. I have always grappled with the concept of something that under performs the S&P, and is used to replace equities in a portfolio as a risk component, can add value while under performing. MY mental math just can't seem to make that work, rebalancing or none. ... and yes, I do remember that "discussion".
He defends and analyzes that here: https://finance.yahoo.com/news/swedroe- ... 00543.html

That does not convince me, however. I think the selected portfolios may be questionable, in that he goes from short term to intermediate treasuries with the addition of the CCF fund. But, in that old discussion, Rick stated:

TIPS are a government-guaranteed hedge against unanticipated inflation. That's the investment to be used if one wants to extend bond maturity.

So perhaps, the comparison should be that, substituting TIPS for short term treasuries vs. substituting intermediate plus CCF? I also would wonder what the results would've been for more diversified portfolios with and without CCF?
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by watchnerd » Sun Apr 07, 2019 11:41 am

Are commodities a good investment for the long haul in a world that is seeking to reduce carbon footprints, use less petroleum, do more recycling, and generally move to a more sustainable economy?
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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by alex_686 » Sun Apr 07, 2019 11:49 am

watchnerd wrote:
Sun Apr 07, 2019 11:41 am
Are commodities a good investment for the long haul in a world that is seeking to reduce carbon footprints, use less petroleum, do more recycling, and generally move to a more sustainable economy?
Sure - why not?

First, we are not investing in the producers, but rather the underlying commodities themselves.

Next, follow you logic. What happens to the commodity markets if we do reduce our use of petroleum? Do we restrict supply, causeing prices to go up? Do we replace it with ethanol, so corn prices go up? Etc. You have a start of a investment thesis, nit a conclusion.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by columbia » Sun Apr 07, 2019 12:00 pm

What has been the long term correlation between commodities and inflation?

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by wootwoot » Sun Apr 07, 2019 12:03 pm

watchnerd wrote:
Sun Apr 07, 2019 11:41 am
Are commodities a good investment for the long haul in a world that is seeking to reduce carbon footprints, use less petroleum, do more recycling, and generally move to a more sustainable economy?
Yes. Emerging markets have little to no interest in reducing their carbon footprint, using less petroleum, and recycling. These are ideas that haven't really taken off in the non-western world.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by Rick Ferri » Sun Apr 07, 2019 12:08 pm

Don't confuse speculating on the price of a pile of rocks with a company that digs up rocks and sells them. One is speculating on the commodity, the other is investing in a going concern company.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by edge » Sun Apr 07, 2019 12:29 pm

Jeez. Can’t they come out with ETFs for the life strategy funds instead of adding these esoteric things?

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by Rick Ferri » Sun Apr 07, 2019 12:31 pm

edge wrote:
Sun Apr 07, 2019 12:29 pm
Jeez. Can’t they come out with ETFs for the life strategy funds instead of adding these esoteric things?
+1
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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by watchnerd » Sun Apr 07, 2019 12:41 pm

alex_686 wrote:
Sun Apr 07, 2019 11:49 am
watchnerd wrote:
Sun Apr 07, 2019 11:41 am
Are commodities a good investment for the long haul in a world that is seeking to reduce carbon footprints, use less petroleum, do more recycling, and generally move to a more sustainable economy?
Sure - why not?

First, we are not investing in the producers, but rather the underlying commodities themselves.

Next, follow you logic. What happens to the commodity markets if we do reduce our use of petroleum? Do we restrict supply, causeing prices to go up? Do we replace it with ethanol, so corn prices go up? Etc. You have a start of a investment thesis, nit a conclusion.
I can't predict the future, of course.

But basing past commodity price performance as it relates to inflation may be very different in the future as inputs and outputs change.

Salted cod was once a widely traded commodity because the logistics networks and lack of refrigeration made it valuable. Ambergris was also once highly valuable.

Commodity corn is government subsidized and the inputs depend heavily upon petroleum industry derived fertilizers -- all of this is heavily subject to changes in policy.

We're likely to moving to a more and more post-industrial economic world...in that world, I'm not sure commodities can be expected to behave like they did during peak industrial expansion.
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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by watchnerd » Sun Apr 07, 2019 12:43 pm

Rick Ferri wrote:
Sun Apr 07, 2019 12:08 pm
Don't confuse speculating on the price of a pile of rocks with a company that digs up rocks and sells them. One is speculating on the commodity, the other is investing in a going concern company.

Rick Ferri
An avid Herman Melville fan would have been happy to invest in a pile of whale oil in 1820.

And what would it be worth now?
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New Vanguard Commodities Fund --Your Thoughts?

Post by Scooter57 » Wed Apr 10, 2019 9:40 pm

[Thread merged into here, see below. --admin LadyGeek]

https://www.philly.com/business/vanguar ... 0410.html

Does this new fund provide useful diversification to a portfolio?

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Re: New Vanguard Commodities Fund --Your Thoughts?

Post by Skiandswim » Thu Apr 11, 2019 12:17 am

Existing thread started on this topic: viewtopic.php?t=277762

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Re: New Vanguard Commodities Fund --Your Thoughts?

Post by nisiprius » Thu Apr 11, 2019 7:43 am

1) For those who like this sort of thing, this is the sort of thing these people like.

2) To get to your question, if we consider two long-established existing "commodities" funds--PCRIX (PIMCO) and FCSSX (Fidelity) and just ask PortfolioVisualizer about correlations, and accept its default parameters, PCRIX has had a correlation of 0.24 with Total Stock...

Image

Started off close to zero, then sharply increased to about 0.5 around 2009 and stayed there. FCSSX didn't start until 2009, and has pretty much paralleled PCRIX; since it started later, it belongs to the period of "higher correlation" with Total Stock. During FCSSX's lifetime, both PCRIX and FCSSX have had about an 0.4 correlation with Total Stock (and close to 1.00 with each other).

So if, by diversification, you mean "low correlation with stocks," I think it's reasonable to expect correlation similar to PCRIX and FCSSX. Whether that's "low" depends on your idea of "low." Whether it's "diversification" depends on your idea of "diversification." Whether that is "worthwhile" is always the subject of spirited debate.

3) "Commodities" funds have been out for a long time. PCRIX, an early one, got a lot of discussion starting in 2008, and was favorably mentioned by Larry Swedroe at times. I didn't choose to invest in one. I would take the fact that Vanguard is now offering one as a reason to add a new asset class. The Fidelity Commodity Strategies Fund, FCSSX, has been out since 2009 and has an expense ratio of 0.05% (I don't know if it always been cheap). If I've never invested in FCSSX in all those years, why would I invest in Vanguard's fund now?

4) I see no obvious reason to imagine that Vanguard's fund will behave very differently from PIMCOs or Fidelity's. It may or may not have an "edge."

But it all boils down to whether you want this category of investment.

As you see, the actual historical behavior of the PIMCO fund (blue), the Fidelity fund (yellow), Morningstar's category average (orange), and Morningstar's benchmark (green) have been broadly similar. The historical behavior is that just at the time this investment category exploded in popularity, funds' correlation with stocks increased, and they began to lose money.

Source

Image

5) The subtitle of the article is "but it ain’t for Mom-and-Pop investors." I enjoy watching movies about sharks but I don't actually want to swim with them. Similarly I enjoy trying to understnad sophisticated products and strategies as a kind of hobby, but I'm a "Mom-and-Pop" investor and I know it. The minimum investment will be $50,000. Too rich for my blood.

6) I don't ever feel any urge to be "first on the block" into some new mutual fund.

7) Anybody who want to get into this has to be clear on the difference between actually investing commodities, which these funds don't do, and holding "collateralized commodity futures," which is what they do. I don't understand it well myself, but I don't need to. An article, Amber waves of pain (turn off Javascript to avoid paywall), describes how retail investors were disappointed when they bought oil "commodities ETFs," USO and OIL, believing they were betting on a rise in oil prices... and oil prices did rise, but their bet did not pay off, because the oil futures the ETFs invested in, did not.
In February 2009, for example, crude rose 7.4 percent while USO fell by 7.4 percent. What was going on? Wolf logged on to Seeking Alpha, a financial blog, and searched for USO. He found plenty of angry discussion about the fund—lots of people were losing lots of money, because thousands of American investors had seen the same sort of opportunity Wolf had. By the end of 2009, they had a record $277 billion invested in commodity ETFs and other securities linked to raw materials—a 50-fold jump from $5.5 billion a decade earlier, according to Barclays Capital. During that time, Wall Street had transformed the reputation of commodities from a hyper-volatile investment that can steal your shirt to a booster for battered portfolios, something that rose when stocks fell and hedged against inflation.
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Re: New Vanguard Commodities Fund --Your Thoughts?

Post by azanon » Thu Apr 11, 2019 8:41 am

Just some quick math here, but they priced out anyone with a portfolio under 1.33 million. I used Vanguard's own Managed Payout fund which currently has a 7.5% weighting (to presumably the same fund?), which would reflect a 666K dollar portfolio. But then, commodities are so volatile, that at a minimum, you have to account for losing at least half. On top of that, if you have at least 50% equities, then I think overall you have to be ready for the overall portfolio to drop by at least half. So that suggests a minimum starting portfolio of 1.33 million (at a 7.5% commodities weighting), to still be able to stay above the fund's 50K minimum requirement.

I agree with nisiprius, they're complicated. So if you really want them, let Vanguard worry about it, and just own VG Managed Payout fund. Pay them to sweat about it. Besides, if you're fancy enough to want commodites, why leave out the other "alternative strategies", such as long-short equity, event driven, currencies, and equity indexed futures. They're fitting all of that fancy stuff in where the bonds normally go, and everyone knows rates are going up, right? :)

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by Scooter57 » Thu Apr 11, 2019 9:39 am

I wonder how this commodities fund would be taxed.

Actual gold capital gains are taxed as a collectible, which is punitive. What happens with the rest of what this fund invests in?

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Re: New Vanguard Commodities Fund --Your Thoughts?

Post by azanon » Thu Apr 11, 2019 9:42 am

nisiprius wrote:
Thu Apr 11, 2019 7:43 am
"Commodities" funds have been out for a long time. PCRIX, an early one, got a lot of discussion starting in 2008, and was favorably mentioned by Larry Swedroe at times. I didn't choose to invest in one. I would take the fact that Vanguard is now offering one as a reason to add a new asset class. The Fidelity Commodity Strategies Fund, FCSSX, has been out since 2009 and has an expense ratio of 0.05% (I don't know if it always been cheap). If I've never invested in FCSSX in all those years, why would I invest in Vanguard's fund now?
My brokerage is at Vanguard, so I do see why some Vanguard clients might want to limit themselves to their own products. Having too much out of Vanguard might drop them down a rung, for example (say from Flagship to Voyager).
nisiprius wrote: As you see, the actual historical behavior of the PIMCO fund (blue), the Fidelity fund (yellow), Morningstar's category average (orange), and Morningstar's benchmark (green) have been broadly similar. The historical behavior is that just at the time this investment category exploded in popularity, funds' correlation with stocks increased, and they began to lose money.

Was that the reason, or was it the stock bull market that began in 09' and a low inflationary environment?
nisiprius wrote:I don't ever feel any urge to be "first on the block" into some new mutual fund.
I completely get this concern for smaller, new ETFs or obscure mutual funds from smaller outfits, but a sole commodity fund from Vanguard that's low cost? Yeah I don't see the issue there. The securities being purchased are certainly not new, and the chance of the fund not surviving is probably not very high. People have been yapping for years for Vanguard to put one out, and this one will likely crush all of the competition like they do with just about everything else. And they'd probably operate it at a loss before they closed their only commodities fund (to save face).

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Re: New Vanguard Commodities Fund --Your Thoughts?

Post by jhfenton » Thu Apr 11, 2019 10:06 am

nisiprius wrote:
Thu Apr 11, 2019 7:43 am
3) "Commodities" funds have been out for a long time. PCRIX, an early one, got a lot of discussion starting in 2008, and was favorably mentioned by Larry Swedroe at times. I didn't choose to invest in one. I would take the fact that Vanguard is now offering one as a reason to add a new asset class. The Fidelity Commodity Strategies Fund, FCSSX, has been out since 2009 and has an expense ratio of 0.05% (I don't know if it always been cheap). If I've never invested in FCSSX in all those years, why would I invest in Vanguard's fund now?
Because this disclaimer is at the top of the fund page for FCSSX:
(i) Not available for individual purchase. This fund is provided to clients as an underlying investment in Fidelity Freedom Funds or certain asset management programs.
I don't actually plan to invest in the Vanguard commodities fund either, but I don't see that FCSSX was ever an option.

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Re: New Vanguard Commodities Fund --Your Thoughts?

Post by jhfenton » Thu Apr 11, 2019 10:15 am

azanon wrote:
Thu Apr 11, 2019 9:42 am
nisiprius wrote:I don't ever feel any urge to be "first on the block" into some new mutual fund.
I completely get this concern for smaller, new ETFs or obscure mutual funds from smaller outfits, but a sole commodity fund from Vanguard that's low cost? Yeah I don't see the issue there. The securities being purchased are certainly not new, and the chance of the fund not surviving is probably not very high. People have been yapping for years for Vanguard to put one out, and this one will likely crush all of the competition like they do with just about everything else. And they'd probably operate it at a loss before they closed their only commodities fund (to save face).
I agree with you. I jumped right into Vanguard's active emerging markets bond (VEGBX) fund 17 months ago. And I jumped into Vanguard's multifactor (VFMFX) fund and value factor ETF (VFVA) 14 months ago. They were strategies I wanted from a company I trusted, and I didn't see a need to wait.

I am intrigued by commodities, but I just don't see the evidence to justify them at this point. If I could see that commodities futures were consistently priced so that I was being compensated for providing insurance to commodity users, I could justify adding the asset class. But that just doesn't seem to be the case over the last decade.

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Re: New Vanguard Commodities Fund --Your Thoughts?

Post by David Althaus » Thu Apr 11, 2019 10:25 am

Commodities, like gold, must be sold to someone willing to pay a higher price. Think I'd rather stick with a broadly diversified VTI businesses (some of which produce commodities) and know that over time the earnings I pay for will probably continue to grow.

All the best

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Re: New Vanguard Commodities Fund --Your Thoughts?

Post by azanon » Thu Apr 11, 2019 11:07 am

David Althaus wrote:
Thu Apr 11, 2019 10:25 am
Commodities, like gold, must be sold to someone willing to pay a higher price. Think I'd rather stick with a broadly diversified VTI businesses (some of which produce commodities) and know that over time the earnings I pay for will probably continue to grow.

All the best
Yeah the quick 101 on how these work in a portfolio for those that use them, is the expected return (in isolation) is roughly just the inflation rate. And then the bonus return comes from regularly re-balancing the position of an uncorrelated, asset class. So hopefully even those that have a commodities position in their portfolio would be willing to concede that the investment looks poor when analyzed in isolation.

FWIW, bonds also fail your brief requirement too. So you're stocks only?

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by adogandzic » Thu Apr 11, 2019 1:46 pm

Here are arguments that one should use trend following (or managed futures) rather than long-only:

https://www.rcmalternatives.com/2017/08 ... -strategy/

https://awealthofcommonsense.com/2017/0 ... heres-how/

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by Ketawa » Thu Apr 11, 2019 2:05 pm

I'd consider a commodities fund if I wanted to extend duration with my fixed income investments. Since I use the G Fund, my fixed income duration is zero, and I have no interest in a commodities fund.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by garlandwhizzer » Thu Apr 11, 2019 2:32 pm

Rick Ferri » Sun Apr 07, 2019 12:08 pm

Don't confuse speculating on the price of a pile of rocks with a company that digs up rocks and sells them. One is speculating on the commodity, the other is investing in a going concern company.

Rick Ferri
1+

It's a personal choice--some will choose to include commodities exposure for diversification and some will not--but you have to keep in mind that in the absence of substantial and pesistent inflation commodities are expected to underperform broadly based low cost equity exposure. The long term expected return of commodities is near zero in real inflation adjusted terms. I personally believe investors now are overly obsessed with diversification much of which is driven by financial industry marketing. In the past Wall Street argued that active management would outperform a market portfolio but there are now mountains of evidence which is finally becoming widely known that this assertion is not true. Now the marketing focus seems to be shifting to another area--portfolio diversification rather than total return. I suspect that the outcome of increased commodity exposure will be lower long term portfolio returns but with slight to modest reduced portfolio volatility along the way. My diversification includes significant equity exposure both SC and LC in US, DM, EM plus the greatest equity diversifier by far, quality bonds, the only one that holds up when the bottom falls out. That is sufficient for me but again it's a personal choice.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by LadyGeek » Thu Apr 11, 2019 3:01 pm

I merged Scooter57's thread into the on-going discussion.
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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by azanon » Thu Apr 11, 2019 4:03 pm

Rick Ferri wrote:
Sat Apr 06, 2019 10:27 am
It was bound to happen eventually because Vanguard investors are going elsewhere to invest in higher-cost commodity funds. Vanguard is all about offering low-cost alternatives to their investors. They did the same thing with international bond funds and factor funds.

This is not an endorsement of those strategies.

Rick Ferri
So I don't think Vanguard can divorce themselves from endorsing those strategies considering that their quantitative equity group uses them in VG Managed Payout Fund, which is designed for retirees (who are more financially vulnerable than any other investor). I think maybe what VG would agree with is that if they're going to be used, professionals like them should decide when and how much to use them.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by azanon » Thu Apr 11, 2019 4:12 pm

Rick Ferri wrote:
Sun Apr 07, 2019 7:27 am
Commodities sound good, they just don't work good in a portfolio.

Rick Ferri
I"m not targeting you specifically on this Rick, because many people say this, but I just continue to be unable to verify this with calculators on the net. The two I use are portfoliocharts and portfoliovisualizer, and every time I substitute commodities for a portion of the bonds, I usually raise return and reduce standard deviation at the same time. And that's including up to present date the past 10 years which haven't been so great for commodities.

They may not work well in the FUTURE, but there's no debating the math of the past. Those calculators are darn hard to argue with. I think it's hard to discuss the subject if we can't even agree on what's happened so far.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by nisiprius » Thu Apr 11, 2019 4:16 pm

columbia wrote:
Sun Apr 07, 2019 12:00 pm
What has been the long term correlation between commodities and inflation?
I got inflation from measuringworth.com (because it goes back earlier than 1913, although I don't know where they got their data). I got prices of various materials from the USGS. I just picked a few items at random that seemed interesting. Most of them indeed have been relatively flat if you stand far away from the screen and squint, although quartz crystal (maroon) was a huge winner up to 1966, when the Geological Survey data ends, for some reason; and industrial diamonds (magenta) were a stunning loser.

Image
Last edited by nisiprius on Thu Apr 11, 2019 4:22 pm, edited 1 time in total.
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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by vineviz » Thu Apr 11, 2019 4:19 pm

azanon wrote:
Thu Apr 11, 2019 4:12 pm
Rick Ferri wrote:
Sun Apr 07, 2019 7:27 am
Commodities sound good, they just don't work good in a portfolio.

Rick Ferri
I"m not targeting you specifically on this Rick, because many people say this, but I just continue to be unable to verify this with calculators on the net.
You can't verify it because statements like this ("they just don't work good") are inherently unverifiable and un-contradictable.

What does "work good" mean to Rick Ferri? I couldn't say.

To me it could means that commodities increase risk-adjusted return of the portfolio AND/OR increases the diversification of the portfolio: like you, I find that commodities quite often do one or both of those things. Those are objective criteria, and they can be tested.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by azanon » Thu Apr 11, 2019 4:29 pm

nisiprius wrote:
Thu Apr 11, 2019 4:16 pm
columbia wrote:
Sun Apr 07, 2019 12:00 pm
What has been the long term correlation between commodities and inflation?
I got inflation from measuringworth.com (because it goes back earlier than 1913, although I don't know where they got their data). I got prices of various materials from the USGS. I just picked a few items at random that seemed interesting. Most of them indeed have been relatively flat if you stand far away from the screen and squint, although quartz crystal (maroon) was a huge winner up to 1966, when the Geological Survey data ends, for some reason; and industrial diamonds (magenta) were a stunning loser.
A good many of us that support the use of commodities are willing to concede "just inflation" at the approximate rate of return of a commodities basket very long term. And yeah, need a basket to avoid something like industrial diamonds. GE didn't do so great either and got sent packing from the S&P 500, FWIW..... It's a problem everywhere you turn.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by columbia » Thu Apr 11, 2019 4:58 pm

nisiprius wrote:
Thu Apr 11, 2019 4:16 pm
columbia wrote:
Sun Apr 07, 2019 12:00 pm
What has been the long term correlation between commodities and inflation?
I got inflation from measuringworth.com (because it goes back earlier than 1913, although I don't know where they got their data). I got prices of various materials from the USGS. I just picked a few items at random that seemed interesting. Most of them indeed have been relatively flat if you stand far away from the screen and squint, although quartz crystal (maroon) was a huge winner up to 1966, when the Geological Survey data ends, for some reason; and industrial diamonds (magenta) were a stunning loser.

Image

I wouldn’t look to it in such a situation, but I suppose that I “get” why gold spiked around 2000. That that had nothing to do with inflation is a - shall we say - interesting behavior for something that’s supposed to carry the day in inflationary times. ie I don’t know how anyone could expect it to do anything one way or the other under any circumstance...it just appears to act randomly.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by JackoC » Thu Apr 11, 2019 5:02 pm

Scooter57 wrote:
Thu Apr 11, 2019 9:39 am
I wonder how this commodities fund would be taxed.

Actual gold capital gains are taxed as a collectible, which is punitive. What happens with the rest of what this fund invests in?
The Vanguard fund would presumably hold commodity futures and OTC total return swap positions*, not physical commodities. Single commodity funds which hold physical precious metals throw off income taxed as collectibles. A fund like the Vanguard one would throw off some futures profit and loss, which is treated as 60% long term capital gain and 40% short term (ie ordinary income), which depending on bracket can be something like the collectibles cg rate. Tax treatment of total return swaps is more complicated with potential for a larger % to be treated as ordinary income.

I believe it would be a significant demerit for a fund like this if the investor did not have tax deferred space to hold it.

*the Fidelity fund to which it's been compared FCSSX, as of recently listed its 'commodity instruments' as 84% total return swaps and only 16% futures contracts. For the economic arguments (contango/backwardation etc) that shouldn't matter between futures and TRS as the same market forces will determine the pricing of each. For end use tax impact in a taxable account it could make some difference.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by nisiprius » Thu Apr 11, 2019 6:04 pm

Portfolio 1: a three-fund 60/40 portfolio with 40% stocks international, i.e. 36% Total Stock, 24% Total International Stock, 40% Total Bond.

Portfolio 2: make room for 15% PIMCO Commodity Real Return Strategy Fund, PCRIX, by cutting down the other funds to 85% of their previous allocation (red).

Portfolio 3: Keep the stock allocations the same as before, take 15% out of bonds (cutting it to 25%), to make room for 15% PCRIX.

Source

Image

Image

Adding commodities to the portfolio two different ways--making room by taking it proportionately out of the traditional securities, or making room by taking it out of bonds--cut return, increased volatility as measured by standard deviation. It did make the best year better. But it made the worst year worse, it increased drawdown, and reduced both of the two measures of risk-adjusted return.

Similar results are seen using PortfolioVisualizer's "asset class" returns for "US stock market," "Global ex-US stock market," "Total US bond market," and "Commodities." Actually the undesirable effects of adding commodities were stronger, doubtless because the PortfolioVisualizer "commodities" dataset begins in 2007. Commodities, at least as exemplified by PCRIX, were doing well from 2002 through 2006.

What are the examples in which commodities exposure, in the form of "commodities" funds and ETFs available to retail investors, would have improved a traditional portfolio?
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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by azanon » Thu Apr 11, 2019 6:23 pm

nisiprius wrote:
Thu Apr 11, 2019 6:04 pm
What are the examples in which commodities exposure, in the form of "commodities" funds and ETFs available to retail investors, would have improved a traditional portfolio?
This might be the impasse where a lot of us are. I, personally, came to trust Tyler at portfoliocharts who's somehow using data far beyond 2002, which we all know predated when commodities were investable (think his data goes to the 70s?). If you use that, you'd be hard pressed to find a scenario where adding commodities doesn't help either return or volatility. And so far he strikes me as a sensible guy who goes out of his way to not use data if its not useful.

But yeah, if we're setting the limit at 02', commodities look atrocious.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by nisiprius » Thu Apr 11, 2019 6:38 pm

azanon wrote:
Thu Apr 11, 2019 6:23 pm
nisiprius wrote:
Thu Apr 11, 2019 6:04 pm
What are the examples in which commodities exposure, in the form of "commodities" funds and ETFs available to retail investors, would have improved a traditional portfolio?
This might be the impasse where a lot of us are. I, personally, came to trust Tyler at portfoliocharts who's somehow using data far beyond 2002, which we all know predated when commodities were investable (think his data goes to the 70s?). If you use that, you'd be hard pressed to find a scenario where adding commodities doesn't help either return or volatility. And so far he strikes me as a sensible guy who goes out of his way to not use data if its not useful.

But yeah, if we're setting the limit at 02', commodities look atrocious.
Ay, there's the rub. I haven't dug into it myself, but obviously in 2004, commodities looked great when Gorton and Rouwenhorst published Facts and Fantasies about Commodity Futures, a very influential paper that was based on an index they constructed, that did not correspond to anything available to a retail investor. PIMCO launched PCRIX in 2002, so I guess it wasn't responding directly to that paper, but something was in the air. In 2006, Thomas Idzorek of Morningstar published a very favorable paper on commodities in retirement portfolio, a paper that perhaps lost some credibility by having been sponsored by PIMCO.

Anyway, in a very short time, interest in "commodities" (or commodity futures or CCFs) skyrocketed and they were close to being consider a standard component in a retirement portfolio. Fidelity added commodities to their target-date Freedom Funds in 2009.

And just about the time that commodities started being widely used, their correlation with stocks went up and their returns turned zero, then negative.

I don't see how the cause could have had anything to do with inflation, which has been low and stable since Volcker.

William J. Bernstein and some others believe that the behavior of commodities was actually changed by "financialization," i.e. by packaging commodity futures into investible funds and ETFs on a large scale.

I don't know how you rationally approach something that was great when you couldn't get it, that turned stinky just when you actually could.
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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by SimpleGift » Thu Apr 11, 2019 7:12 pm

The long-term price history of commodities is interesting — and a bit counterintuitive to my mind. From 1980-2017, the world's population increased by 65%, from 4.46 billion to 7.55 billion people. However, the real price of a diversified basket of commodities decreased by 36% (chart below).

The time-price of this same basket of commodities fell even further, by 65% — i.e., due to productivity gains, commodities that took 60 minutes of work to buy in 1980 took only 21 minutes of work to buy in 2017 (in gray, chart below).
The apparent conclusion seems to be that world population growth and the resulting increase in human ingenuity leads to more abundant commodities, and thus lower commodity prices over the long term. I'll pass on Vanguard's new commodity fund.

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by columbia » Thu Apr 11, 2019 7:36 pm

If the best expectation is matching inflation, why not just own TIPS?

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Re: Vanguard Announces Plans to Launch Commodities Fund

Post by james22 » Fri Apr 12, 2019 12:11 am

SimpleGift wrote:
Thu Apr 11, 2019 7:12 pm
The apparent conclusion seems to be that world population growth and the resulting increase in human ingenuity leads to more abundant commodities, and thus lower commodity prices over the long term. I'll pass on Vanguard's new commodity fund.
Julian Simon wins again.

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