commodities funds (UK)

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Topic Author
wearethefall
Posts: 250
Joined: Sun Jul 29, 2007 6:01 am

commodities funds (UK)

Post by wearethefall »

I'm reconsidering my current commodities holdings. Given the current state of the UK I very much like having some assets that are non-GBP and have low correlations with other things.

My current exposure is through a WisdomTree ETF (0.5% expense ratio):

https://www.wisdomtree.eu/en-gb/product ... ommodities

But are there any other better alternatives out there? Cheers.
Valuethinker
Posts: 41146
Joined: Fri May 11, 2007 11:07 am

Re: commodities funds (UK)

Post by Valuethinker »

Looks like the link is broken?

At least on my browser

US TIPS bonds should have very low correlation w UK.

FTSE100 has c 30% of earnings from UK activities.
c-strong
Posts: 11
Joined: Sun Aug 02, 2020 4:10 pm

Re: commodities funds (UK)

Post by c-strong »

I looked at commodities ETFs recently. I decided against allocating to commodities in the end, but the ETFs I looked at were CMOP (0.19% TER) and BCOG (0.15% TER), both of which looked like decent options.
Topic Author
wearethefall
Posts: 250
Joined: Sun Jul 29, 2007 6:01 am

Re: commodities funds (UK)

Post by wearethefall »

glorat
Posts: 678
Joined: Thu Apr 18, 2019 2:17 am

Re: commodities funds (UK)

Post by glorat »

Just for fun, I decided to read up on these so-called "investments. All 3 seem to track the "Bloomberg Commodity Index Total Return" index so if you were really choosing between them, probably pick the one with lowest expense (but also consider sensible AUM and bid/ask spreads).

What is this index?
Bloomberg Commodity Index Total Return
The Index is designed to reflect the movement in the price of the futures contracts (that are continuously rolled on a pre-determined rolling schedule) of the commodities used in the Bloomberg Commodity IndexSM. The Index is a broadly diversified index priced by reference to commodity futures contracts from the major commodity sectors: Energy, Agriculture, Industrial Metals, Precious Metals and Livestock.When the Index is rebalanced no sector may constitute more than 33% and no indiviudal commodity may constitute less than 2% of the Index. A futures contract is an agreement to purchase a commodity at an agreed price, with delivery and payment to take place at a specified point in the future. Futures contracts are generally disposed of just before the term of the contract expires and new contracts entered into in order to avoid taking actual delivery of the commodity in question (a process known as 'rolling'), so that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold which would cause an investor in commodity futures to make an additional loss. This market trend is known as 'contango'. Alternatively the contracts being purchased may be cheaper than the ones being sold which would result in an additional gain, known as 'backwardation'. This price difference is commonly referred to as "roll yield". As the roll yield is incorporated into the calculation of the value of the Index, it may therefore have a positive or negative impact on the value of the Index depending on whether there is contango or backwardation. The ETC will also be affected as its value is based upon the value of the Index.
Oh dear. This is the classic retail investor trap thinking the ETF invests in commodities in someway such that if commodity prices go up, you will make money and vice versa. That is not the case. The above description explains it in technical terms and so is very transparent but you have to be informed on "contango" and "backwardation" to know what it means. This is the trouble with investing in FUTURES of commodities and neither the commodities nor their companies themselves. (p.s Futures in equities are fine because there is no cost of carry).

Rather than lecturing on the theory, I encourage readers to read up on the experience of the ETF ticker "OIL" where retail buyers KNEW that oil prices were going to rise (and they were right!!!) so bought into OIL - only to find they lost a tonne of money even though OIL prices went up as expected.

I hope that the OIL case study is enough scaremongering to force readers to be educated before "investing" in Commodities Futures or ETFs of them.
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