Published on by Stoyan Bojinov on October 18, 2011 | Updated February 10, 2014

Portfolio Strategy

The Futures Free Commodity ETFdb Portfolio is designed for investors who wish to construct a commodity-centric portfolio that avoids holding any futures-based products. This investment strategy may appeal to those who are bullish on commodity prices over the next several years, but wish to avoid the nuances and drawbacks associated with futures-based ETPs. The appeal of investing in commodities stems from the versatility of this asset class; an allocation to commodities can serve as an excellent diversifying agent to any long-term portfolio, potentially enhancing risk-adjusted returns over the long haul. Another reason for why commodities have taken on greater appeal is because of their potential to serve as a hedge against inflation during periods of rising prices; a feat that few asset classes can match. Booming populations and rising levels of urbanization across emerging markets are two key fundamental factors that are also likely to contribute to increasing demand for raw materials and agricultural goods.

The distinguishing factor of the Futures Free Commodity ETFdb Portfolio is that it achieves well-rounded exposure across all of the major commodities without actually investing in any futures-based ETPs. Many popular commodity products invest in futures contracts, allowing for exposure to resources without taking physical possession. We have chosen to avoid this futures-based approach for this ETFdb Portfolio because we believe its susceptible to serious drawbacks and costly nuances that can impact bottom line returns. ETPs that invest in futures generally have an automated roll process to avoid delivery on the contracts, so when a contract is about to reach expiration, the fund automatically sells out of the front month and buys in to a future month. However, when futures are contangoed (the futures contracts expiring further into the future are more expensive than the spot contract), this automated roll process will sell low and buy high, erasing gains for its investors and creating a drag on portfolio returns over the long run.

The Futures Free Commodity ETFdb Portfolio delivers futures free commodity exposure by allocating a significant portion of its assets to stocks of commodity producing firms. This approach is appealing to investors for the simple reason that commodity producers are businesses that have a stream of cash flows and dividends associated with them, while commodity futures do not, making them more difficult to value. Investors should keep in mind that while commodity producers may bear a strong correlation with broad equity markets, potentially diminishing some of the diversification benefits associated with this asset class. The Futures Free Commodity ETFdb Portfolio rounds out exposure to precious metals through a physically-backed fund. This portfolio also features an allocation to a one of a kind commodity-centric currency fund, in place of traditional fixed income exposure.

This portfolio may be excessively risky for retired investors with very strict current income needs, but may appeal to risk-tolerant investors who have a bullish outlook on commodities.

• Risk Tolerance: Moderate-High. This portfolio is subject to more risk than traditional stock/bond portfolios given its rather significant allocation to commodities.

Portfolio Snapshot

Below are the holdings and allocations for the Futures Free Commodity ETFdb Portfolio. For each ETF included in this portfolio, we have also provided alternative funds that offer similar exposure.