VCMDX and being long or short commodities

[Carsson3]

I invested in VCMDX, the Vanguard Commodities Strategy Fund, thinking that this fund would be a way to go long on commodities. However I understand Vanguard to have told me on a phone call today that this fund is long or short commodities depending entirely on the current judgment of fund management.
I suppose I thought rather vaguely that, since Vanguard has no funds that short stocks, there must be no Vanguard funds that short commodities. I also was not clear that about 75% of this fund is TIPS, my oversight.
I read an excellent book on commodities trading, The World for Sale, but I can't say I know a lot about commodities trading.
If this fund goes long or short on this commodity or that, then being in this fund is very unlike being in a stock fund that by policy is long or short stocks. Instead, being in VCMDX is a 'bet' on the skill (and luck?) of a specific commodity trading group.
So being in this fund is something like financing a skillful gambler to go to Las Vegas, and by arrangement the investor gets a portion of her winnings, if any. Or, you could say being this fund is like being in a hyperactive stock fund with day traders, or at least very short-term trading intensively year around.
So the individual investor's view of the world economy's direction, and commodity prices generally, is not in any way relevant to the decision to be in this fund or not. It all just comes down to bet on, to me, unknown trading skill levels in a small group and its leader, and I do not even know how to evaluate skill levels, except perhaps by peer comparisons. But this fund is only about three years old, so a very small data set. In hindsight, the only reason to be in this fund is a faith in Vanguard's ability to choose a solidly successful trader. Probably there is no such thing as a commodity trader who is by policy long or short. I am not critiquing Vanguard, but rather just reporting my experience and analysis here, in case it helps someone else.

[NiceUnparticularMan]

As an aside, commodities futures funds are usually collateralized, which means they usually have a lot of TIPS or TBills. That is why these are sometimes known as CCF funds (collateralized commodities futures).

Anyway, there are in fact some relatively simple and transparent CCF funds available, but they historically had all sorts of issues with front-running and also contango, the latter of which generates negative roll returns:

https://www.investopedia.com/terms/c/contango.asp

One possible solution is an actively-traded fund like VCMDX. I don't necessarily think that is entirely just like betting on a gambler, because theoretically there are commodity futures which make more or less sense for third-party investors. Note commodity futures in theory are primarily for the benefit of producers and consumers. So identifying when it makes sense for third parties to step in with additional capital, at potential profit to them, is not necessarily just like gambling in a casino.

Still, there are also rules-based indices, and funds that track those indices, designed to address front-running and contango and such in a way that doesn't require ongoing active management. So if that is closer to your comfort level you could consider those.

[JoMoney]

Unless you're buying specific commodities that you plan to make use of yourself, even being long-only commodities is just a trading strategy. You're going short cash and long the commodity in hopes you'll find someone else to sell it to for more later on. There is no intrinsic expectation for a commodity to earn a profit or yield interest, it actually costs you to hold and store it (and/or roll the derivative contracts forward) as well as expenses from the middle-men making a market for people to trade in.

[Carsson3]

As an aside, commodities futures funds are usually collateralized, which means they usually have a lot of TIPS or TBills. That is why these are sometimes known as CCF funds (collateralized commodities futures).

Anyway, there are in fact some relatively simple and transparent CCF funds available, but they historically had all sorts of issues with front-running and also contango, the latter of which generates negative roll returns:

https://www.investopedia.com/terms/c/contango.asp

One possible solution is an actively-traded fund like VCMDX. I don't necessarily think that is entirely just like betting on a gambler, because theoretically there are commodity futures which make more or less sense for third-party investors. Note commodity futures in theory are primarily for the benefit of producers and consumers. So identifying when it makes sense for third parties to step in with additional capital, at potential profit to them, is not necessarily just like gambling in a casino.

Still, there are also rules-based indices, and funds that track those indices, designed to address front-running and contango and such in a way that doesn't require ongoing active management. So if that is closer to your comfort level you could consider those.

Thanks, good info. From what I have read, third parties make money by identifying a strong economic trend and selling purchased futures into that, if the trend does work out. So in that sense most commodity funds are long-oriented I would think. It looks to me that chart directions over a given time period for commodity funds are fairly similar to each other, with the winner funds having obviously higher peaks and higher valleys. I bought VCMDX, my first commodity category investment ever, because the price was in the lower third of a three year range, which is also one reason why I owned TIPS funds anyway. The 'gambler' analogy is flawed in that some believe that gambling at some 'Las Vegas' games can be skills-based, but granted it typically is not.

[Carsson3]

Unless you're buying specific commodities that you plan to make use of yourself, even being long-only commodities is just a trading strategy. You're going short cash and long the commodity in hopes you'll find someone else to sell it to for more later on. There is no intrinsic expectation for a commodity to earn a profit or yield interest, it actually costs you to hold and store it (and/or roll the derivative contracts forward) as well as expenses from the middle-men making a market for people to trade in.

Good points. I was looking for something to balance out my large commitment to nominal Treasuries, but since I also already had a good portion of TIPS anyway, I really did not diversify after all. TIPS are surprisingly volatile on pricing, as some previous Vanguard papers have stated. In a way, a commodities fund may be a kind of 'super-TIPS', i. e. with more upside and downside volatility that TIPs, but moving in the same direction as TIPs, I suspect.

[BF3000]

The described phone call is confusing. I haven’t read the prospectus, but I listened to the audio interview that vanguard used for marketing when this thing rolled out. It was described as a fund that tracks the Bloomberg commodity index with the aim of giving a portfolio some upside during bouts of surprise inflation. It said that using short term tips as collateral, instead of tbills, was one feature (Pimco did this earlier but more expensive). Also said active management would place bets on futures of longer date than, say, DCBM. The goal of active management was to slightly beat the bloomberg index. No mention of shorting commodities akin to a tend following strategy.

[Dry-Drink]

VCMDX investor here, who betted VCMDX quite a bit before diving in.

I invested in VCMDX, the Vanguard Commodities Strategy Fund, thinking that this fund would be a way to go long on commodities. However I understand Vanguard to have told me on a phone call today that this fund is long or short commodities depending entirely on the current judgment of fund management.

VCMDX is long AND short commodities, with a target of about 100% long overall on average. That's why it uses BCOM as its index (which it has handily beaten since inception btw). It can be hard to judge exactly its notional exposure given the holdings because it uses swaps for a lot of the exposure. It looks like it's 131% long and 45% short right now, so maybe about 86% long overall as of its last holdings. However, the Vanguard website gives you the exact overall exposure and they say it's really just about 100% long right now (with similar weights to BCOM for various commodities). I'd trust the page more but the holdings more or less confirm it.

I suppose I thought rather vaguely that, since Vanguard has no funds that short stocks, there must be no Vanguard funds that short commodities.

Vanguard has other funds that employ shorting, such as its Market Neutral fund and its Alternative Strategies fund.

So the individual investor's view of the world economy's direction, and commodity prices generally, is not in any way relevant to the decision to be in this fund or not.

The individual investor's view on commodities is HUGELY important with VCMDX because it is about 100% long commodities on average.

It all just comes down to bet on, to me, unknown trading skill levels in a small group and its leader, and I do not even know how to evaluate skill levels, except perhaps by peer comparisons.

VCMDX is an actively-managed commodities fund. Like an actively managed stock fund, the return of the underlying will matter greatly. However, you're right, the "skill" of the manager will have some effect on top.
Commodities is a place where some active managing like VCMDX makes tremendous sense to me. Short-term contracts tend to be more expensive, and VCMDX generally shorts those. By shorting those, it can be even more long the longer-term, more attractively priced contracts. So it achieves about 100% commoditiy exposure, plus some additional roll yield on top.

No mention of shorting commodities akin to a tend following strategy.

VCMDX might have times where it has less than 100% overall exposure. The managers over in Vanguard Quant department know what they're doing and I wouldn't be surprised if they peppered VCMDX with a little trend-following by decreasing some overall exposure based on trends.

However, VCMDX is pretty far from traditional CTA trend strategies, which not only can go all the way down to 0% overall exposure but will even go negative overall if the trend is negative enough. VCMDX will, for the most part, just be at around 100% overall from what I understand.

So far, its correlation to BCOM is basically 100% so the track record confirms what I understand about the fund.

[Carsson3]

As an aside, commodities futures funds are usually collateralized, which means they usually have a lot of TIPS or TBills. That is why these are sometimes known as CCF funds (collateralized commodities futures).

Anyway, there are in fact some relatively simple and transparent CCF funds available, but they historically had all sorts of issues with front-running and also contango, the latter of which generates negative roll returns:

https://www.investopedia.com/terms/c/contango.asp

One possible solution is an actively-traded fund like VCMDX. I don't necessarily think that is entirely just like betting on a gambler, because theoretically there are commodity futures which make more or less sense for third-party investors. Note commodity futures in theory are primarily for the benefit of producers and consumers. So identifying when it makes sense for third parties to step in with additional capital, at potential profit to them, is not necessarily just like gambling in a casino.

Still, there are also rules-based indices, and funds that track those indices, designed to address front-running and contango and such in a way that doesn't require ongoing active management. So if that is closer to your comfort level you could consider those.

Since I have never done any commodities investing before, I will likely either stick with the Vanguard fund, or just depart the commodities space altgether. VCMDX is said to be about 75% TIPS, which presumably is the trading collateral. Doesn't this mean that I indirectly own the TIPS, and that the fund's overall performance up or down could arise from only or mostly TIPs' values during some periods? In other words, how well the commodity portion of the fund is doing at any given time is often just not clear at all? I can understand the necessity for collateral, but I do not see an easy way to assess fund performance. I got into commodities due to a Goldman Sachs podcast (late 22?) stating that commodities are underinvested and should climb more in 2023 than in the two prior years, which were very good. I cannot help being reminded that it was Goldman Sachs, if I heard things correctly, that told Silicon Valley Bank to sell a lot of long dated Treasuries all at once, and publicize it.

[NiceUnparticularMan]

As an aside, commodities futures funds are usually collateralized, which means they usually have a lot of TIPS or TBills. That is why these are sometimes known as CCF funds (collateralized commodities futures).

Anyway, there are in fact some relatively simple and transparent CCF funds available, but they historically had all sorts of issues with front-running and also contango, the latter of which generates negative roll returns:

https://www.investopedia.com/terms/c/contango.asp

One possible solution is an actively-traded fund like VCMDX. I don't necessarily think that is entirely just like betting on a gambler, because theoretically there are commodity futures which make more or less sense for third-party investors. Note commodity futures in theory are primarily for the benefit of producers and consumers. So identifying when it makes sense for third parties to step in with additional capital, at potential profit to them, is not necessarily just like gambling in a casino.

Still, there are also rules-based indices, and funds that track those indices, designed to address front-running and contango and such in a way that doesn't require ongoing active management. So if that is closer to your comfort level you could consider those.

Since I have never done any commodities investing before, I will likely either stick with the Vanguard fund, or just depart the commodities space altgether. VCMDX is said to be about 75% TIPS, which presumably is the trading collateral. Doesn't this mean that I indirectly own the TIPS, and that the fund's overall performance up or down could arise from only or mostly TIPs' values during some periods? In other words, how well the commodity portion of the fund is doing at any given time is often just not clear at all? I can understand the necessity for collateral, but I do not see an easy way to assess fund performance.

Yes, the return on the collateral is one of the three sources of return for CCFs (the other two being spot price changes and roll returns). Their relative weight in any given period can vary because the other two sources of returns can vary a lot and indeed can easily be negative in a given period.

By the way, there are indices that strip out the collateral return, called "excess return" indices. Off hand, though, I am not sure there are many if any funds which really try to track an excess return index. Some, including VCMDX, benchmark against an excess return index for their commodities, but still also include collateral return as a component of return. I think DFA's fund has a similar structure, and so on.

The basic problem is you are more or less required to have collateral if you invest in commodities futures. So I am not sure how you would truly get out of that.

For what it is worth, though--for both good and bad, CCF funds will tend to get dominated by the spot and roll returns whenever anything interesting is happening with unexpected inflation. Hence their much higher observed "beta" to unexpected inflation than TIPS.

I got into commodities due to a Goldman Sachs podcast (late 22?) stating that commodities are underinvested and should climb more in 2023 than in the two prior years, which were very good. I cannot help being reminded that it was Goldman Sachs, if I heard things correctly, that told Silicon Valley Bank to sell a lot of long dated Treasuries all at once, and publicize it.

Personally, I am not interested in trying to time commodity price cycles. As always, it is easy to get burned just by getting the timing a bit off on one end or the other, and unexpected things can easily happen.

To me, the case for commodities is really about how even a quite small allocation could potentially add some unexpected inflation protection at a portfolio level. But in my view you should expect that to come at a cost to overall risk-adjusted returns. But it is true if you got the timing right, maybe you could do better. Or a lot worse if you got it wrong.