Common wisdom holds that commodities should be an integral part of a core portfolio for some classes of investors. The now iconic study by Yale Professors Rowenhorst and Gorton set the stage several years ago for broad commodities baskets to be included in investment portfolios for "beta," or diversification purposes. A good number of broad-based, diversified commodity ETPs are available to fill this investment need.
In addition, many advisors are now beginning to seek absolute returns through the use of more focused commodity ETFs. These single-commodity products can be used to very effectively overweight or underweight specific commodities held in the core portion of a portfolio.
Precious metal, energy and agricultural single-commodity ETPs can be used to add "alpha," or absolute returns to a portfolio. These commodities are viewed by many as integral to any well-balanced portfolio and often geopolitical and/or supply concerns motivate investors to overweight or underweight these commodities.
Again, there is a good selection of single commodity ETPs from which to choose, and more products are being added almost daily.
Liquidity, Valuation and Order Execution
Commodity ETPs are generally designed for high liquidity, even if the daily average number of shares traded is quite low. The number of shares authorized for issuance is very often a more accurate indicator of the liquidity achievable in most commodity-based ETPs; this information can be found on the website and in the prospectus of the ETP in question.
Although ETPs are valued throughout the day with an active bid/ask market, the spread between the bid and ask can vary depending upon the ETP and the volatility of its underlying holdings. Investors should always check the Intraday Indicative Value (IIV) of the ETP before determining an entry or exit price. The IIV is calculated every 15 seconds by the listing exchange and is an accurate gauge of the ETPs actual value, but it is only valid when the underlying futures market is open for trading, and it is only accurate at the very moment it is calculated.
Importantly, buy and sell orders should always be entered as limit orders, never as market orders in any ETP. Large volume, or block trades can be executed through your traditional execution platform or through a number of execution desks available to advisors from a variety of Broker Dealer participants; advisors should contact their broker-dealer for any execution related questions regarding commodity ETPs.
The growing slate of commodity ETPs gives advisors and their clients an affordable, liquid, easy to trade category of investments with which to gain commodity exposure in their portfolios. With just a little bit of study, advisors can now use ETPs to effectively diversify and enhance their investment objectives within the commodity sector.
Sal Gilbertie is the president of Teucrium Trading, LLC, (www.teucrium.com), an issuer of single commodity focused next generation exchange-traded products, including, the Teucrium Corn Fund (NYSE: CORN), Teucrium Natural Gas Fund (NYSE: NAGS) and the Teucrium WTI Crude Oil Fund (NYSE: CRUD).