With few exceptions, the commodities complex is being taken to task this year. Even diversified commodities exchange-traded products are not offering much shelter from the storm in the face of slumping oil prices.
For example, the WisdomTree Continuous Commodity ETF (NYSE: GCC) is down 4.3 percent year to date. Compared to some other commodities ETFs, particularly single commodities funds, GCC’s 2017 year-to-date showing is not all that bad. Still, endorsing commodities from the long side is viewed as a bold call these days.
GCC: A Bold Call
GCC “has lost an annualized 5.1 percent since its inception on January 25, 2008, or 38.7 percent cumulatively,” said WisdomTree in a recent note. “Even that showing was enough to put it at the top of the heap among the five diversified commodity ETFs that have been around that long. Yet a relative performance like that can leave much to be desired.”
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That is the bad news. The good news is that tactical traders can take advantage of GCC’s rebound potential, particularly when applying the simple notion that one year’s laggards can often turn into the following year’s leaders. Data suggest “stinkers” can, at certain times, actually be valuable.
Stinker returns “came in at 9.02 percent annually for more than 20 years. That came with an annualized standard deviation of just 11.96 percent, lower than all of the equity indexes because aggregate bonds came up four times (at the end of 1996, 1997, 2006 and 2007). That also got some contrarians into bonds on December 31, 2007, a fortuitous move when Lehman collapsed in 2008,” according to WisdomTree.
GCC’s index methodology is advantageous to investors because the underlying index is underweight energy commodities relative to competing strategies. That helps lower volatility. GCC currently allocates 11.75 percent of its weight to energy commodities, but agriculture, precious metals and livestock account for larger percentage’s of the fund’s roster.
GCC “takes 17 commodities, everything from corn to platinum to lean hogs, and invests equally in each of them. There is no major exposure to any particular commodity, no riding oil from triple digits down to $28 per barrel, at least not to the extent that oil represents anything more than 1/17th of the portfolio,” said WisdomTree.
GCC does an admirable job of reducing volatility. For example, the ETF’s three-year annualized volatility is significantly below that of the largest oil and silver ETFs.
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