Vanguard recommends commodities to combat sudden inflation

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Kevin K
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Vanguard recommends commodities to combat sudden inflation

Post by Kevin K »

Never thought I'd see the day. Gold bullion next month? :wink:

https://advisors.vanguard.com/insights/ ... 6632010697
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Re: Vanguard recommends commodities to combat sudden inflation

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They have a commodities fund. They want to "nudge" readers to consider it.

Not that I want to buy it.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by Svensk Anga »

Commodities (chiefly oil) did well the last time there was sustained high inflation, in the 1970's. I would have to be convinced that they will perform as well if we get another round of serious inflation. Seems like the drivers are different now.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by stan1 »

You are on their advisors page not their retail investors page. Vanguard is a business. They give their clients in this case advisors what they ask for. I would not confuse marketing material from any business such as Vanguard for advice specific to your situation. Finally although there may still be some debate and the future is unknown current inflation (2020/2021) is in large part due to shortages in the supply chain (e.g. computer chips but also other manufactured goods in a disrupted supply and logistics chain). Although not measured also reduction in quality such as hotel rooms without maid service. I would not assume that current situation is similar to 1970s. Instead of commodities you should have had your backyard filled with used cars to sell off.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by NiceUnparticularMan »

We've discussed Vanguard's research on this in various contexts before. Their point, which is really to be expected but it also is reflected in the data, is that while it is possible to buy products which reliably protect themselves from unexpected inflation, such as TIPS, there are not many products which will actually react strongly enough, and predictably enough, to unexpected inflation such as to help offset other parts of your portfolio if they are responding negatively.

But diversified collateralized commodity futures do have that type of relationship to unexpected inflation. The problem is there is an opportunity cost to using them--if inflation is as expected, they are likely just to have very low returns ala short-term TIPs. And if inflation is unexpectedly low, they will likely have even worse returns. Because there is no free lunch in marketed securities.

My two cents is if your portfolio is mostly made up of assets that are self-protecting, this is not such a problem. So, say, a portfolio made up of a mix of Social Security, TIPS, diversified real estate/REITs, ex-U.S. stocks (which provide something of a dollar devaluation hedge), and value-tilted U.S. stocks (value stocks historically have had a somewhat more reliably positive response to unexpected inflation, at least in relative terms) is not necessarily in need of much or any portfolio level unexpected inflation hedging.

The problem is a little more present if your portfolio is mostly nominal USD bonds and neutral-to-growth-tilted U.S. stocks. Nominal USD bonds predictably behave poorly in response to unexpected USD inflation. Non-value U.S. stocks are less predictable, but sometimes can behave quite poorly in response to unexpected USD inflation (as the article suggests, that is largely a function of whether unexpected inflation is predictive of unexpected future GDP growth, which is sometimes true and sometimes the opposite depending on current conditions). If your portfolio is mostly those two things, or other things without a predictably positive relationship to unexpected inflation, then you might think about whether you would benefit from having an effective and relatively reliable unexpected inflation hedge.

As a final thought, generally USD inflation has been in a downward trend recent years, and so things like CCFs or funds heavy on CCFs have done poorly--as expected. So at this point, they are extremely unpopular, and conversely "simple" mixes of mostly nominal USD bonds and neutral-to-growth U.S. stocks are relatively popular.

But I do think there is quite a bit of recency bias going on there. Since expected real returns are already so low based on current valuation measures, it wouldn't take 1970s-style stagflation conditions to create a pretty bad combined period for nominal USD bonds and non-value U.S. stocks.

Again, there are lots of ways to try to provide against such a scenario, and so diversified CCFs might not even be necessary to consider. But I do think at this point such defensive measures are often being simply ignored, because it has now been a fairly long time since they would have had more benefit than cost.
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Re: Vanguard recommends commodities to combat sudden inflation

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secondopinion wrote: Tue Sep 14, 2021 4:24 pm They have a commodities fund. They want to "nudge" readers to consider it.

Not that I want to buy it.
"They" being Vanguard? What fund is that? I only see an index mentioned in the article, no fund listed that tracks that index. Last I heard results from funds that did tried to track broad commodity "indexes" were... problematic... not achieving the results of tracking the index.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by nisiprius »

JoMoney wrote: Wed Sep 15, 2021 8:38 am
secondopinion wrote: Tue Sep 14, 2021 4:24 pm They have a commodities fund. They want to "nudge" readers to consider it.

Not that I want to buy it.
"They" being Vanguard? What fund is that? I only see an index mentioned in the article, no fund listed that tracks that index. Last I heard results from funds that did tried to track broad commodity "indexes" were... problematic... not achieving the results of tracking the index.
VCMDX, the Vanguard Commodity Strategies Fund. Not an index fund. Introduced in 2019. Someone from Vanguard in charge of the department that decides what to offer spoke at the 2019 Boglehead's meeting and walked us through a tortuous flow chart supposedly explaining how they had determined that they needed a commodities fund to fulfill the part of their mission statement, "to give them the best chance for investment success."

For better or worse, Vanguard is clearly reverting to the mean and becoming more and more like other providers, offering the same things competitors offer and the same things customers--or perhaps advisors--want.

Vanguard notably stayed aloof from the collateralized-commodity-futures fad of about 2003 to 2009, when "everyone" echoed a paper saying commodities should be part of standard retirement-savings portfolios... and Fidelity damaged their target-date funds by including them: Fidelity retirement funds take multiyear hit from commodities bet. Vanguard did include them in its buzzword-compliant Managed Payout Fund.

But I don't think Vanguard has the strength of character to stay off bandwagons any more.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by stan1 »

nisiprius wrote: Wed Sep 15, 2021 8:57 am But I don't think Vanguard has the strength of character to stay off bandwagons any more.
Vanguard is a business not a religious institution that would be characterized by strength of character.

Is Fidelity, Schwab, Apple, Microsoft, Tesla or any other business expected to show strength of character?

This forum has some unreasonable expectations for Vanguard because Jack Bogle's personal traits and beliefs have been unfairly assigned to a business that needs to be competitive 20 years after his departure. Longing for Jack Bogle's Vanguard is like longing for the United Airlines of the 1960s flying my parents to Hawaii for their honeymoon. It doesn't exist any more, and maybe it's more romanticized that it actually was at the time.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by NiceUnparticularMan »

JoMoney wrote: Wed Sep 15, 2021 8:38 am Last I heard results from funds that did tried to track broad commodity "indexes" were... problematic... not achieving the results of tracking the index.
So in recent years, inflation has been more unexpectedly low than high, CCF funds have predictably done relatively poorly as a result, and there is extremely little interest in even discussing them in most personal investor forums. Basically, if you are paying for car accident insurance and you are never in an accident over some period of time, your "investment" in the form of premiums is going to look very bad in terms of returns. The same basic concept applies to funds which hedged against unexpectedly high inflation with CCFs and instead inflation was unexpectedly low.

That said, for the record--two of the identified problems with the initial wave of CCF index funds were front-running and contango. So, there are now CCF funds designed to deal with both of those problems, basically by not mechanically buying the futures on their commodities list on a set schedule, but allowing some flexibility on both timing and on whether or not that specific commodity is in contango over the relevant contract period. Some of these funds are quasi-index funds in the sense they follow specific rules for how they do all that, but (hopefully) the specific application of those rules are sufficiently hard to predict in advance of actual purchases that front-running isn't profitable. Others are just actively managed with those as stated investment goals.

Again, since this entire class of funds has predictably underperformed in recent years, very few personal investors are even remotely interested in these newer generations of CCF funds. But if and when we go through a period where inflation is more unexpectedly high than low, then I suspect there will be a renewed interest in the topic.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by afan »

Also
Tax inefficient
It is meaningless to talk broadly of commodities. The returns to a fund will depend on the mix of commodities on which it is based and the practices with respect to rolling contracts as they expire. There is no standard index for this. Many different implementations. Impossible to know what to expect from any particular fund.

As for the insurance analogy, when shopping for insurance, one looks for a reliable payoff and low costs. No one would buy auto insurance if the payment after an accident were determined randomly. Commodity funds have transaction and management costs and generate ordinary income. They would make a terrible insurance.

They do permit one to have money in something other than stocks and bonds. Still unclear to me whether that low correlation would be worth the volatility and cost.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by afan »

Not something I would do but I assume one could carefully construct a set of futures positions on T bonds that would be near perfect hedges against inflation. You would have to maintain the positions, take gains and losses as the prices jumped around and sort out your taxes. Unlike investing in CCFs of a basket of commodities, one would have a reliable performance when inflation returns.

This might be difficult to put into a fund format, which may be why you do not see it advertised by those offering the service.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by JC Denton »

I wish fully understood the trajectory of federal debt, it’s affect on my money, my investments and the economy/inflation. As it is I just don’t have very much faith in the future or my investments.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by willthrill81 »

So Vanguard is recommending market timing now? :shock:
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Re: Vanguard recommends commodities to combat sudden inflation

Post by NiceUnparticularMan »

afan wrote: Wed Sep 15, 2021 10:34 am As for the insurance analogy, when shopping for insurance, one looks for a reliable payoff and low costs. No one would buy auto insurance if the payment after an accident were determined randomly. Commodity funds have transaction and management costs and generate ordinary income. They would make a terrible insurance.
Well, that is why it is an analogy. It is true diversified CCFs are not in fact literally insurance, and the point of the analogy did not depend on them literally being insurance.

The more literal term for using CCFs as a way of trying to create an offset to the way your other securities might likely react to unexpected inflation would be a "hedge". And the literal way of expressing the same thought is that if you investment some capital in a hedging security in order to protect against possible events of type X, typically it will have an opportunity cost in terms of expected return. And then if X never happens over a particular period, you will have incurred this opportunity cost and gotten no hedging benefit.

I will note, though, it is quite common for people to analogize hedges to insurance, with the understanding that it is indeed an imperfect analogy. In fact, interestingly that exact same dynamic is played out at this Investopedia article on hedges:

https://www.investopedia.com/terms/h/hedge.asp
Hedging is somewhat analogous to taking out an insurance policy. If you own a home in a flood-prone area, you will want to protect that asset from the risk of flooding—to hedge it, in other words—by taking out flood insurance. In this example, you cannot prevent a flood, but you can plan ahead of time to mitigate the dangers in the event that a flood did occur.

There is a risk-reward tradeoff inherent in hedging; while it reduces potential risk, it also chips away at potential gains. Put simply, hedging isn't free. In the case of the flood insurance policy example, the monthly payments add up, and if the flood never comes, the policyholder receives no payout. Still, most people would choose to take that predictable, circumscribed loss rather than suddenly lose the roof over their head.

In the investment world, hedging works in the same way. Investors and money managers use hedging practices to reduce and control their exposure to risks. In order to appropriately hedge in the investment world, one must use various instruments in a strategic fashion to offset the risk of adverse price movements in the market. The best way to do this is to make another investment in a targeted and controlled way. Of course, the parallels with the insurance example above are limited: in the case of flood insurance, the policy holder would be completely compensated for her loss, perhaps less a deductible. In the investment space, hedging is both more complex and an imperfect science.
However, I would not agree the typical range of responses of diversified CCFs to unexpected USD inflation is "random". It certainly isn't perfectly predictable--as the quote notes, we are indeed talking about an "imperfect science" with this sort of hedging strategy, But the reason they typically respond with something within a range of positive betas to unexpected inflation, as Vanguard's data shows, is based in fairly straightforward economics.

Now, if you could find an unexpected inflation hedge which had an equal or better post-cost (including tax) expected return AND an equal or better expected beta to unexpected inflation AND that beta to unexpected inflation was even more reliable, that would indeed be a better hedge against unexpected inflation.

But again Vanguard's research is helpful in pointing out that at least most common securities do not have all of those properties. TIPS, for example, have a very reliable response to inflation as measured by CPI (since it is contractual and formulaic in nature), and around the same expected return as diversified CCFs. But they do not have nearly as high an expected beta to unexpected inflation. And in fact, since their beta is so reliable, it is reliably LOW in the sense of always being right around 1. And that means they are not actually usable as hedges at the portfolio level.
They do permit one to have money in something other than stocks and bonds. Still unclear to me whether that low correlation would be worth the volatility and cost.
No, that would be a bad reason to hold CCFs. There is no good reason to believe they would likely improve the efficiency of a portfolio for those particular reasons.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by NiceUnparticularMan »

afan wrote: Wed Sep 15, 2021 1:40 pm Not something I would do but I assume one could carefully construct a set of futures positions on T bonds that would be near perfect hedges against inflation. You would have to maintain the positions, take gains and losses as the prices jumped around and sort out your taxes. Unlike investing in CCFs of a basket of commodities, one would have a reliable performance when inflation returns.

This might be difficult to put into a fund format, which may be why you do not see it advertised by those offering the service.
You could also take a leveraged position in TIPs, which is actually what some people de facto do to the extent they, say, hold a fixed-rate mortgage, student loan, or so on, and then invest in TIPs at the same time.

Again, though, the degree to which you can achieve a certain beta to unexpected inflation these ways would depend on how far you were willing to go with such strategies. And I do think you would have to look carefully at costs, taxes, other risks you might be increasing, and so on.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by NiceUnparticularMan »

willthrill81 wrote: Wed Sep 15, 2021 2:59 pm So Vanguard is recommending market timing now? :shock:
Vanguard's forward-looking asset models have never assumed the future will be exactly like the past, and they do try to forecast the most likely range of outcomes based on current conditions. And to the extent using those forecasts in investment planning counts as "market timing", that isn't a new thing for them.

That said, only part of their argument in the linked article is based on their forecast that "U.S. equities' hedging power is likely to decrease in the future, as commodity-related sectors including energy and materials constitute far less of the equity market, and sectors such as technology and consumer discretionary—not effective inflation hedges—constitute more relative to three decades ago." Although that is in fact an interesting point and sounds pretty plausible to me.

But in any event, their other observation is that three decades of data supports the hypothesis that diversified CCFs typically have a large, positive beta to unexpected inflation.

And I am not sure that particular combination of arguments really counts as market timing per se. If the basic hypothesis is positive beta to unexpected increases in commodity prices is a useful unexpected inflation hedge, and at least part of the issue with broad market equities is that their response to unexpected inflation has decreased with commodity producers losing share in those markets, then is it really market timing to suggest the need to offset that declining share in some other way to achieve the same expected hedging effect?

I mean, suppose you wanted X% in TIPS, and had 2X% in some bond fund which was 50% TIPS. So far so good.

But then the bond fund becomes only 25% TIPS. Would it be market timing to say you then needed to figure out a way to make up for that reduction in TIPS?
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Re: Vanguard recommends commodities to combat sudden inflation

Post by AlohaJoe »

Kevin K wrote: Tue Sep 14, 2021 4:05 pm Never thought I'd see the day. Gold bullion next month? :wink:

https://advisors.vanguard.com/insights/ ... 6632010697
Jack Bogle launched Vanguard's precious metals fund in 1984. I think it was actively managed, too.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by nisiprius »

AlohaJoe wrote: Thu Sep 16, 2021 5:44 am
Kevin K wrote: Tue Sep 14, 2021 4:05 pm Never thought I'd see the day. Gold bullion next month? :wink:

https://advisors.vanguard.com/insights/ ... 6632010697
Jack Bogle launched Vanguard's precious metals fund in 1984. I think it was actively managed, too.
I may be wrong--I don't know where to find old annual reports--but I don't believe it ever held meaningful quantities of actual precious metal, although it was allowed to by the fund rules. By the time I was paying attention, it was something like 99% stocks (precious metal equity), with some microscopic holding of platinum.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by afan »

NiceUnparticularMan wrote: Thu Sep 16, 2021 4:53 am
afan wrote: Wed Sep 15, 2021 1:40 pm Not something I would do but I assume one could carefully construct a set of futures positions on T bonds that would be near perfect hedges against inflation. You would have to maintain the positions, take gains and losses as the prices jumped around and sort out your taxes. Unlike investing in CCFs of a basket of commodities, one would have a reliable performance when inflation returns.

This might be difficult to put into a fund format, which may be why you do not see it advertised by those offering the service.
You could also take a leveraged position in TIPs, which is actually what some people de facto do to the extent they, say, hold a fixed-rate mortgage, student loan, or so on, and then invest in TIPs at the same time.

Again, though, the degree to which you can achieve a certain beta to unexpected inflation these ways would depend on how far you were willing to go with such strategies. And I do think you would have to look carefully at costs, taxes, other risks you might be increasing, and so on.
You would have to look at actual implementation. However, you would have a high R2 in your inflation hedge. Much higher than with commodities. Due to leverage the futures or leveraged position would be volatile. One would have to see whether it was more volatile than a CCF fund. If at the same beta it had higher volatility, it may still be a better solution due to the R2.
CCFs are highly volatile, making them less appealing.

Under normal circumstances, the expected return to TIPS is positive. One would expect a leveraged basket of TIPS to have a volatile but positive return. The downside is that you run the risk of losing so much when the bet goes against you that you are wiped out.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by Ferdinand2014 »

nisiprius wrote: Wed Sep 15, 2021 8:57 am
JoMoney wrote: Wed Sep 15, 2021 8:38 am
secondopinion wrote: Tue Sep 14, 2021 4:24 pm They have a commodities fund. They want to "nudge" readers to consider it.

Not that I want to buy it.
"They" being Vanguard? What fund is that? I only see an index mentioned in the article, no fund listed that tracks that index. Last I heard results from funds that did tried to track broad commodity "indexes" were... problematic... not achieving the results of tracking the index.
VCMDX, the Vanguard Commodity Strategies Fund. Not an index fund. Introduced in 2019. Someone from Vanguard in charge of the department that decides what to offer spoke at the 2019 Boglehead's meeting and walked us through a tortuous flow chart supposedly explaining how they had determined that they needed a commodities fund to fulfill the part of their mission statement, "to give them the best chance for investment success."

For better or worse, Vanguard is clearly reverting to the mean and becoming more and more like other providers, offering the same things competitors offer and the same things customers--or perhaps advisors--want.

Vanguard notably stayed aloof from the collateralized-commodity-futures fad of about 2003 to 2009, when "everyone" echoed a paper saying commodities should be part of standard retirement-savings portfolios... and Fidelity damaged their target-date funds by including them: Fidelity retirement funds take multiyear hit from commodities bet. Vanguard did include them in its buzzword-compliant Managed Payout Fund.

But I don't think Vanguard has the strength of character to stay off bandwagons any more.

Fidelity dumped the small allocation to commodities (1.5% or so) in the TDF's about 2 years ago. They have made 2 changes since 2019. 1.) Added long term treasury's of 3% at every target date as a partial replacement for the total investment grade bond fund and upped the international component to approximately market weight. TIPS and treasury bill money market funds still get rolled in about 5 years before retirement and gradually increased.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by nisiprius »

Svensk Anga wrote: Tue Sep 14, 2021 4:31 pm Commodities (chiefly oil) did well the last time there was sustained high inflation, in the 1970's. I would have to be convinced that they will perform as well if we get another round of serious inflation. Seems like the drivers are different now.
You say "oil did well," but funds like these do not hold oil. They hold commodity futures: VCMDX:
The fund will rely on commodity derivative securities.
That's not a technicality. Circa 2009, retail investors piled into "oil ETFs," OIL and USO, certain the price of oil would go up. The price of oil did go up--and they had trouble understanding why their ETFs went down.

To be sure, Vanguard's discussion is based on commodity futures.

I have another problem with Vanguard's paper which is that it seems irrelevant to study commodities as an inflation hedge starting in 1989. Nobody has needed an inflation hedge since 1989! Their data period begins almost exactly with the end of the most recent period of high inflation. I've seen things like this before, where people are studying short-term correlations of noisy small fluctuations in the CPI with other things. It seems pointless. If suitable data for periods of high inflation doesn't exist, then don't look at some other period just because that's where the data is.

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Re: Vanguard recommends commodities to combat sudden inflation

Post by nisiprius »

Ferdinand2014 wrote: Thu Sep 16, 2021 6:39 am...Fidelity dumped the small allocation to commodities (1.5% or so) in the TDF's about 2 years ago...
At one point the allocation to commodities was about 10% in some of their funds. It was serious, not just decoration.

In fact we got a poster in the forum asking about possible cash drag in the fund because Morningstar was showing a 10% "cash" allocation in the fund--it was the commodity exposure, which shows up in Morningstar's allocation charts as "cash" rather than as "other" for the same (slightly mysterious) reason that it does in the Fidelity Series Commodity Strategy Fund, FCSSX.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by NiceUnparticularMan »

afan wrote: Thu Sep 16, 2021 6:37 am
NiceUnparticularMan wrote: Thu Sep 16, 2021 4:53 am
afan wrote: Wed Sep 15, 2021 1:40 pm Not something I would do but I assume one could carefully construct a set of futures positions on T bonds that would be near perfect hedges against inflation. You would have to maintain the positions, take gains and losses as the prices jumped around and sort out your taxes. Unlike investing in CCFs of a basket of commodities, one would have a reliable performance when inflation returns.

This might be difficult to put into a fund format, which may be why you do not see it advertised by those offering the service.
You could also take a leveraged position in TIPs, which is actually what some people de facto do to the extent they, say, hold a fixed-rate mortgage, student loan, or so on, and then invest in TIPs at the same time.

Again, though, the degree to which you can achieve a certain beta to unexpected inflation these ways would depend on how far you were willing to go with such strategies. And I do think you would have to look carefully at costs, taxes, other risks you might be increasing, and so on.
You would have to look at actual implementation. However, you would have a high R2 in your inflation hedge. Much higher than with commodities. Due to leverage the futures or leveraged position would be volatile. One would have to see whether it was more volatile than a CCF fund. If at the same beta it had higher volatility, it may still be a better solution due to the R2.
CCFs are highly volatile, making them less appealing.

Under normal circumstances, the expected return to TIPS is positive. One would expect a leveraged basket of TIPS to have a volatile but positive return. The downside is that you run the risk of losing so much when the bet goes against you that you are wiped out.
So just penciling this out--Vanguard has diversified CCFs at a beta of 7-9 to unexpected inflation over the last decade, TIPS at 1. I'm not sure that is a reliable range for CCFs going forward, but if you were in fact hoping to leverage TIPS to a beta of 7+ . . . that's a lot of leverage.

So it would be interesting to see someone actually synthesize the results (I'm too lazy) and make a comparison in terms of volatility, taxable income, and so on with TIPS leveraged to that degree.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by NiceUnparticularMan »

nisiprius wrote: Thu Sep 16, 2021 6:41 am I have another problem with Vanguard's paper which is that it seems irrelevant to study commodities as an inflation hedge starting in 1989. Nobody has needed an inflation hedge since 1989! Their data period begins almost exactly with the end of the most recent period of high inflation. I've seen things like this before, where people are studying short-term correlations of noisy small fluctuations in the CPI with other things. It seems pointless. If suitable data for periods of high inflation doesn't exist, then don't look at some other period just because that's where the data is.
So what they are interested in studying is hedges for unexpected high inflation in relative terms, not high inflation in absolute terms. This is a critical distinction because securities like nominal bonds will do fine in periods of high inflation when that high inflation is actually expected.

Given that, during long periods of generally low inflation in absolute terms, you can still have periods of inflation which are unexpectedly high in relative terms. I suppose ideally you would have the net over the period be more unexpectedly high than unexpectedly low inflation, but I am not sure that really matters all that much in terms of trying to study the relationship between a security and a particular factor.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by AlohaJoe »

nisiprius wrote: Thu Sep 16, 2021 6:30 am
AlohaJoe wrote: Thu Sep 16, 2021 5:44 am
Kevin K wrote: Tue Sep 14, 2021 4:05 pm Never thought I'd see the day. Gold bullion next month? :wink:

https://advisors.vanguard.com/insights/ ... 6632010697
Jack Bogle launched Vanguard's precious metals fund in 1984. I think it was actively managed, too.
I may be wrong--I don't know where to find old annual reports--but I don't believe it ever held meaningful quantities of actual precious metal, although it was allowed to by the fund rules. By the time I was paying attention, it was something like 99% stocks (precious metal equity), with some microscopic holding of platinum.
Sure, but my point is that some people think In The Good Old Days, Vanguard was some perfect paragon of the 5 or 6 Boglehead-approved broad-based index funds and nothing else. And Now It Is Going To The Dogs after Bogle left. Except Vanguard has had stupid sector funds forever. It has had active funds for forever. It has had active bonds funds in the 1980s, when Bogle was the CEO. They started their junk bond fund in 1978! Active funds like PRIMECAP and STAR and Explorer were launched under Bogle. He may have repeatedly written about only investing in the US but he had no problem launching active international funds like VWIGX.

All of which is fine by me. But people act shocked -- SHOCKED! -- when they see Vanguard launch some new weird fund and pretend it has never happened before.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by Broken Man 1999 »

stan1 wrote: Wed Sep 15, 2021 9:02 am
nisiprius wrote: Wed Sep 15, 2021 8:57 am But I don't think Vanguard has the strength of character to stay off bandwagons any more.
Vanguard is a business not a religious institution that would be characterized by strength of character.

Is Fidelity, Schwab, Apple, Microsoft, Tesla or any other business expected to show strength of character?

This forum has some unreasonable expectations for Vanguard because Jack Bogle's personal traits and beliefs have been unfairly assigned to a business that needs to be competitive 20 years after his departure. Longing for Jack Bogle's Vanguard is like longing for the United Airlines of the 1960s flying my parents to Hawaii for their honeymoon. It doesn't exist any more, and maybe it's more romanticized that it actually was at the time.
Well said!

Me, I cannot believe Mr Bogle would have been willing to see his baby become an also-ran company by choosing to not adapt to the times. Founders have large egos when it comes to their companies, as well they should.

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Re: Vanguard recommends commodities to combat sudden inflation

Post by willthrill81 »

NiceUnparticularMan wrote: Thu Sep 16, 2021 5:08 am
willthrill81 wrote: Wed Sep 15, 2021 2:59 pm So Vanguard is recommending market timing now? :shock:
Vanguard's forward-looking asset models have never assumed the future will be exactly like the past, and they do try to forecast the most likely range of outcomes based on current conditions. And to the extent using those forecasts in investment planning counts as "market timing", that isn't a new thing for them.

That said, only part of their argument in the linked article is based on their forecast that "U.S. equities' hedging power is likely to decrease in the future, as commodity-related sectors including energy and materials constitute far less of the equity market, and sectors such as technology and consumer discretionary—not effective inflation hedges—constitute more relative to three decades ago." Although that is in fact an interesting point and sounds pretty plausible to me.

But in any event, their other observation is that three decades of data supports the hypothesis that diversified CCFs typically have a large, positive beta to unexpected inflation.

And I am not sure that particular combination of arguments really counts as market timing per se. If the basic hypothesis is positive beta to unexpected increases in commodity prices is a useful unexpected inflation hedge, and at least part of the issue with broad market equities is that their response to unexpected inflation has decreased with commodity producers losing share in those markets, then is it really market timing to suggest the need to offset that declining share in some other way to achieve the same expected hedging effect?

I mean, suppose you wanted X% in TIPS, and had 2X% in some bond fund which was 50% TIPS. So far so good.

But then the bond fund becomes only 25% TIPS. Would it be market timing to say you then needed to figure out a way to make up for that reduction in TIPS?
Making changes to one's AA on the basis of expected market movements is bona fide market timing. Being a resident trend follower, I'm not diametrically opposed to that, but let's call it for what it is. If Vanguard is recommending that investors permanently change their AA to include commodities, that's not market timing. But it sounds like the recommendation is coming specifically to address higher inflation and is temporary.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by NiceUnparticularMan »

willthrill81 wrote: Thu Sep 16, 2021 9:11 am
NiceUnparticularMan wrote: Thu Sep 16, 2021 5:08 am
willthrill81 wrote: Wed Sep 15, 2021 2:59 pm So Vanguard is recommending market timing now? :shock:
Vanguard's forward-looking asset models have never assumed the future will be exactly like the past, and they do try to forecast the most likely range of outcomes based on current conditions. And to the extent using those forecasts in investment planning counts as "market timing", that isn't a new thing for them.

That said, only part of their argument in the linked article is based on their forecast that "U.S. equities' hedging power is likely to decrease in the future, as commodity-related sectors including energy and materials constitute far less of the equity market, and sectors such as technology and consumer discretionary—not effective inflation hedges—constitute more relative to three decades ago." Although that is in fact an interesting point and sounds pretty plausible to me.

But in any event, their other observation is that three decades of data supports the hypothesis that diversified CCFs typically have a large, positive beta to unexpected inflation.

And I am not sure that particular combination of arguments really counts as market timing per se. If the basic hypothesis is positive beta to unexpected increases in commodity prices is a useful unexpected inflation hedge, and at least part of the issue with broad market equities is that their response to unexpected inflation has decreased with commodity producers losing share in those markets, then is it really market timing to suggest the need to offset that declining share in some other way to achieve the same expected hedging effect?

I mean, suppose you wanted X% in TIPS, and had 2X% in some bond fund which was 50% TIPS. So far so good.

But then the bond fund becomes only 25% TIPS. Would it be market timing to say you then needed to figure out a way to make up for that reduction in TIPS?
Making changes to one's AA on the basis of expected market movements is bona fide market timing. Being a resident trend follower, I'm not diametrically opposed to that, but let's call it for what it is. If Vanguard is recommending that investors permanently change their AA to include commodities, that's not market timing.
I guess my question is what counts as "making changes to one's AA"?

If you define your asset allocation in terms like 60% stocks, 40% bonds, and then you do 55% stocks, 40% bonds, 5% CCFs, OK, you changed, right?

But what if your stock index was originally 10% commodity-linked stocks, but now it is 5%?

So, you could define your original asset allocation as 50% non-commodity-linked stocks, 10% commodity-linked stocks, 40% bonds. But now without you doing anything, your asset allocation has already changed to 55% non-commodity-linked stocks, 5% commodity-linked stocks, 40% bonds.

And if that is how you see it, would doing something to correct for that effect actually be changing your AA? Or is it more trying to keep it the same?

I don't think that is an easy question to answer. I think it depends on whether you care about having a certain commodity-linked hedge or not. If you don't care, then you can ignore these index changes. But if you do care, you may need to offset index changes in some way to protect your investment strategy from unintended changes.
But it sounds like the recommendation is coming specifically to address higher inflation and is temporary.
That's not how I read the article per se. As I read it, they set out a general problem:
Financial markets expect a certain level of inflation and factor it into the asset prices they set, a condition theoretically neutral for investment portfolios. Unexpected inflation, on the other hand, can erode portfolios' purchasing power, a challenge especially for investors with a shorter investment horizon, such as retirees.
That's not a problem dependent on current market conditions. It is a problem which is always present.

That said, I am not suggesting this article is coming out of the blue. They do in fact reference "unexpected inflation, like we've seen recently." And we know from discussions around here there is an uptick in people worrying about inflation. So I do not doubt the audience for this article is such people.

Nonetheless, the substance of their argument doesn't depend on any sort of claim that the risk of unexpected inflation is unusually high right now.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by willthrill81 »

NiceUnparticularMan wrote: Thu Sep 16, 2021 9:38 am
willthrill81 wrote: Thu Sep 16, 2021 9:11 am
NiceUnparticularMan wrote: Thu Sep 16, 2021 5:08 am
willthrill81 wrote: Wed Sep 15, 2021 2:59 pm So Vanguard is recommending market timing now? :shock:
Vanguard's forward-looking asset models have never assumed the future will be exactly like the past, and they do try to forecast the most likely range of outcomes based on current conditions. And to the extent using those forecasts in investment planning counts as "market timing", that isn't a new thing for them.

That said, only part of their argument in the linked article is based on their forecast that "U.S. equities' hedging power is likely to decrease in the future, as commodity-related sectors including energy and materials constitute far less of the equity market, and sectors such as technology and consumer discretionary—not effective inflation hedges—constitute more relative to three decades ago." Although that is in fact an interesting point and sounds pretty plausible to me.

But in any event, their other observation is that three decades of data supports the hypothesis that diversified CCFs typically have a large, positive beta to unexpected inflation.

And I am not sure that particular combination of arguments really counts as market timing per se. If the basic hypothesis is positive beta to unexpected increases in commodity prices is a useful unexpected inflation hedge, and at least part of the issue with broad market equities is that their response to unexpected inflation has decreased with commodity producers losing share in those markets, then is it really market timing to suggest the need to offset that declining share in some other way to achieve the same expected hedging effect?

I mean, suppose you wanted X% in TIPS, and had 2X% in some bond fund which was 50% TIPS. So far so good.

But then the bond fund becomes only 25% TIPS. Would it be market timing to say you then needed to figure out a way to make up for that reduction in TIPS?
Making changes to one's AA on the basis of expected market movements is bona fide market timing. Being a resident trend follower, I'm not diametrically opposed to that, but let's call it for what it is. If Vanguard is recommending that investors permanently change their AA to include commodities, that's not market timing.
I guess my question is what counts as "making changes to one's AA"?

If you define your asset allocation in terms like 60% stocks, 40% bonds, and then you do 55% stocks, 40% bonds, 5% CCFs, OK, you changed, right?

But what if your stock index was originally 10% commodity-linked stocks, but now it is 5%?

So, you could define your original asset allocation as 50% non-commodity-linked stocks, 10% commodity-linked stocks, 40% bonds. But now without you doing anything, your asset allocation has already changed to 55% non-commodity-linked stocks, 5% commodity-linked stocks, 40% bonds.

And if that is how you see it, would doing something to correct for that effect actually be changing your AA? Or is it more trying to keep it the same?

I don't think that is an easy question to answer. I think it depends on whether you care about having a certain commodity-linked hedge or not. If you don't care, then you can ignore these index changes. But if you do care, you may need to offset index changes in some way to protect your investment strategy from unintended changes.
I've never once heard of an investor specifically seeking out 'commodity-linked stocks'. Though I have no doubt that there are investors who desire allocations to such stocks, I doubt they are so numerous as to warrant discussion in this context.

Your broader point that the composition of the indices one has purchased (I know that you can't literally buy an index, but we all know what I mean) may have changed meaningfully since one bought it is interesting. Some investors might have liked the S&P 500 more when it was more tilted toward manufacturing and less now that it is more tech-heavy. But I'm not sure that it's in most investors' best interests to tilt to certain sectors.
NiceUnparticularMan wrote: Thu Sep 16, 2021 9:38 am That said, I am not suggesting this article is coming out of the blue. They do in fact reference "unexpected inflation, like we've seen recently." And we know from discussions around here there is an uptick in people worrying about inflation. So I do not doubt the audience for this article is such people.
Perhaps you're correct. But I strongly suspect that if recent inflation was 2% or less that this recommendation to own commodities wouldn't have seen the light of day.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Vanguard recommends commodities to combat sudden inflation

Post by Forester »

re; inflation, all one can do is maybe tilt toward Value, own some inflation-indexed bonds, and tough it out. I note the unremarkable return advantage of the popular $DBC commodity ETF since early 2020, versus global stocks. Commodity future markets were never intended to be public investment vehicles.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by afan »

willthrill81 wrote: Thu Sep 16, 2021 9:47 am

I've never once heard of an investor specifically seeking out 'commodity-linked stocks'. Though I have no doubt that there are investors who desire allocations to such stocks, I doubt they are so numerous as to warrant discussion in this context.
Vanguard materials fund VAW. $3.8 billion. Somebody wants it.
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Re: Vanguard recommends commodities to combat sudden inflation

Post by willthrill81 »

afan wrote: Thu Sep 16, 2021 2:23 pm
willthrill81 wrote: Thu Sep 16, 2021 9:47 am

I've never once heard of an investor specifically seeking out 'commodity-linked stocks'. Though I have no doubt that there are investors who desire allocations to such stocks, I doubt they are so numerous as to warrant discussion in this context.
Vanguard materials fund VAW. $3.8 billion. Somebody wants it.
Of course, but I've not heard anyone here asking about it, nor have I heard a cogent recommendation in favor of doing so.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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