Today we face a vicious circle in which interdependencies among commodities ensure that scarcities and higher prices in any one commodity mean scarcities and higher prices in all, cautions Stephen Leeb, editor of Investing Daily's The Complete Investor.
Our commodity choices are simply defensive holdings. Despite solidly outperforming the S&P 500, commodity stocks have underperformed the underlying commodities. If we are right about resource scarcities, that will change.
Stocks of every sort take their cues from the expected future, and it’s not surprising that at the moment, in the face of an aggressive Fed and fears of what lies ahead, commodity stocks in common with other stocks reflect investors’ doubts about the future. Their current decline could continue, but our bet is that buying at current prices offers investors the best chance for exceptional rewards that they’re going to see.
One of our two newest picks is a commodity ETF, Invesco Optimum Yield Diversified Commodity Strategy (PDBC). It joins the Low-Risk/Hedge segment of our model Growth Portfolio — whose allocation we have raised to 30%, up from 25%.
PDBC gives investors a diversified stake in the world’s most important commodities and a way to benefit from rising commodity prices without being penalized during periods when commodity stocks are hurt by a general market decline.
The fund actively manages a sizable collection of futures contracts of major commodities, including precious metals (gold and silver); industrial metals (zinc, copper, and aluminum); foods (corn, wheat, and soybeans); energy (Brent and WTI crude, natural gas, and gasoline). Approximately 50% of the fund is invested in energy.
With a five-year annualized return of over 16%, the fund has outperformed most broad-based commodity indexes including the very broad CRB Index.
PDBC has a sister fund, Invesco DB Commodity Index Tracking Fund (DBC). The major difference is that PDBC has been set up so that unlike a commodity pool it doesn’t require holders to fill out a K-1 form for tax purposes.
Another difference, which does not affect total returns, is that PDBC distributes capital gains rather than automatically investing them. You may want to check with your accountant to see which of these nearly identical funds is best for you.