Commodity ETFs In Your Portfolio

By Paul Britt,

Shutterstock photo

How bad have broad commodity returns been? Bad enough.

Here's a snapshot over the last 12 months ending April 30. I've chosen to look at the three largest and most well-established broad commodity ETFs. That means the ones with the most assets that have at least five years of history.

These are the PowerShares DB Commodity Tracking Fund (NYSEArca:DBC), the iPath Dow Jones-UBS Commodity Total Return ETN (NUYSEArca:DJP) and iShares S&P GSCI Commodity-Indexed Trust (NYSEArca:GSG).

Sample Portfolios w/ Broad Commodity ETFs

Then I made a simple risk/return plot of the portfolios, with returns (for the holding period) on the vertical axis and risk (annualized daily standard deviation) on the horizontal axis. This means portfolios in the upper left look good, while lower right is not the place to be.

The verdict? Over the past 12 months, the commodity allocation would have hurt regardless of the fund chosen.

I-Year Portfolio Performance

So what's going on here? Shouldn't a dollop of commodity exposure help an otherwise-vanilla portfolio?

Well, not when the commodity funds brought a small but unhelpful trifecta of negative returns, relatively high volatility and relatively high correlations to equity-about 0.56 to SPY-as they did over the 12-month period.

Over the three-year period, commodities had strong double-digit returns. But equities were even stronger. And during this period, bonds-the third leg of these simple portfolios-produced steady returns with low volatility and a wonderfully negative correlation to equities.

So the allocation to commodities in this period hurts, mostly by taking away from these two strong and complementary components.

When we look back for a full five years, the picture changes a bit.

5-Year Performance Don't forget to check's ETF Data section.

Copyright ® 2012 IndexUniverse LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: DBC , DJP , GSG

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