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from most ETFs linked to standard commodities indexes . That offers an opportunity for actively managed commodities ETFs like the USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund ( SDCI ), which can participate when they see bull markets forming . Such funds have fewer investing constraints than their index-linked ETF peers .
“ Any two stocks inside the S & P 500 often move in tandem . But that ’ s not true in commodities . Cocoa , cotton , crude oil and copper all have different drivers ,” says Love . That means a supply crunch in the oil market could drive some commodity prices sharply higher while having a negligible effect on others .
During the past three years , the SummerHaven fund has jumped 62 % while the iShares fund has climbed only 48 % and the Invesco fund has risen only 37 %. The SummerHaven fund also has a fivestar Morningstar rating . It uses a fairly straightforward strategy , selecting from 14 commodities futures contracts , which are equally weighted and then rebalanced monthly . It charges 0.84 % annually .
Another option for advisors seeking a dynamic approach is the Direxion Auspice Broad Commodity Strategy ETF ( COM ). Although the fund is linked to an index , it ’ s got a price momentum approach and is rebalanced monthly , which gives it the feel of active management .
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“ Any two stocks inside the S & P 500 often move in tandem . But that ’ s not true in commodities . Cocoa , cotton , crude oil and copper all have different drivers .”
— John Love USCF Investments
For example , the Direxion fund will be long on an individual commodity showing an upward price trend . On the other hand , it will switch to cash when a commodity is in a downtrend . And the underlying index has the complete flexibility to be long on 12 commodities or on zero depending on what the price is doing . The fund has a four-star Morningstar rating and charges 0.70 % annually .
Ultimately , adding commodities to an ETF portfolio is more than just choosing the fund with the lowest expense ratio . Advisors must decide if they want a static indexing approach with certain limitations or if they want a dynamic approach with more flexibility . Ultimately , that decision that can make a big difference .
RON DELEGGE II is the founder of ETFguide . com and author of several books , including Habits of the Investing Greats and Portfolio Architecture : A Handbook for Investors .
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JUNE 2024 | FINANCIAL ADVISOR MAGAZINE | 39