Diversifying with Commodities

08/25/2006 12:00 am EST


Keith Fitz-Gerald

Chief Investment Strategist, The Money Map Report

Keith Fitz-Gerald is an exceptional advisor and professional trader with a safety-first focus on defensive portfolio management. Here he offers investors a way to participate in the commodities boom while minimizing risk…


“I think, without a doubt, that PIMCO Commodities Real Return Fund (PCRDX) is the best buy you can make today. This fund offers us the possibility of profiting from pricing pressures on all commodities in a way that minimizes risk and maximizes potential returns. It’s a specialized natural resources mutual fund that buys and sells futures and options while holding inflation-indexed securities and other fixed-income instruments in reserve. At the present time, energy accounts for a dominant 72% or so with another 22% in industrial materials.


“Among the few open-end mutual funds that invest in commodities, PCRDX invests in derivative instruments that seek to replicate the performance of the Dow Jones-AIG Commodity Index. Because the fund can gain full exposure to the index with only a portion of assets, the remaining assets are invested in Treasury Inflation-Protected Securities (TIPS). This gives it a valuable safety component that’s simply not present in other commodities alternatives.


“PCRDX can also invest up to 30% of its assets in foreign-currency-denominated securities. As such, it provides an important hedge against further dollar declines. What’s more important, it will provide a lot of upside potential over the next few years if demand for commodities continues to pick up the way I think it will. PCRDX also kicks off a nice 17% dividend yield.


“Such performance is hardly atypical over the long run when it comes to commodities and troubled times. But to me, the best part is that you don’t have to jump in with both feet in order to derive some real portfolio-stabilizing benefits. As a matter of act, a mere 5-10% of your total portfolio ought to do it according to many studies on how commodities interact with other asset classes in a variety of market conditions.


“PCRDX is a great investment in your IRA or in your retirement plan because you can’t carry your gains forward. In a taxable account that could mean a sizable tax bill when commodities do really well, as they have in the past under similar market conditions.


“Another important consideration to everything I recommend is expenses. PCRDX’s expenses run an acceptable 1.24%, which is only 80% of the 1.54% you might expect to pay for another commodity fund. That may not sound like much, but over three years or more, the lower expense ratio can save you a lot of money. Buy PCRDX under $16 and plan to add to it in the future. The minimum investment is $5,000.”

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