Commodity Plays for a Retirement Watch

10/04/2018 5:00 am EST

Focus: COMMODITIES

Robert Carlson

Editor, Retirement Watch

At this point, the risks in the markets are greater than the potential for positive surprises. It’s unlikely the economy can grow faster than it has recently, but growth could slow. Corporate profits are likely to be pinched by rising compensation and commodity prices, cautions Bob Carlson, editor of Retirement Watch.

Weak growth internationally and the strong dollar both reduce the potential for U.S. companies to increase revenues and earnings. Expectations are high. Negative surprises could cause investors to sell quickly. Because of the substantial uncertainty about the economy and markets, it’s a good idea to maintain diversification and a margin of safety.

Commodities usually are strong performers in the late stage of the economic cycle, and that’s been the case so far in this cycle. The latest pause generally is attributed to lower growth in China, which is a major buyer of key commodities.

iShares Commodities Select Strategy (COMT) is unique, having about 30% of the fund invested in stocks of commodities producers and 70% invested in futures contracts in commodities. The allocation among commodities is changed according to a proprietary model of fund manager BlackRock.

The model doesn’t try to capture short-term trends. The fund almost always is at least 25% invested in energy. We own gold through iShares Gold Trust (IAU) as a hedge against inflation and geopolitical crises. The fund’s price is unchanged for the last four weeks and down 8.39% so far in 2018.

The last four weeks saw a pause in the recovery of JPMorgan Alerian MLP (AMJ). This is an exchange-traded not  (ETN) that promises to pay investors the return of a capitalization-weighted index of the 50 largest MLPs plus periodic income distributions.

The ETN’s been recovering from a bear market in energy followed by restructuring of many MLPs. It declined 2.30% in the last four weeks but has returned 7.28% in 2018. The yield is 6.78%.

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