Choosing the Right Commodity Mutual Fund

[Updated on July 24, 2018]

It’s been a while since investors have had a reason to celebrate any type of commodity, but that could all be changing. One of the primary reasons would be a relatively weak U.S. dollar, which is expected to support the commodity asset class as a whole. At the same time, it is important to note that commodities have failed to live up to the bullish expectations as fears of trade wars, geopolitical tensions and uncertainties associated with such events have overpowered the fundamental strength the asset class demonstrated while making a recovery post the financial crisis.

U.S. steel futures led the gains, rising by nearly 37% – courtesy of the imposition of U.S. tariffs on imported steel. Moreover, U.S. WTI crude oil continues to be one of the best commodity performers for the year, registering nearly 17% in prices since the beginning of 2018. On the flipside, gold is down for the year-to-date.

Nevertheless, hopping aboard the commodity bandwagon isn’t as easy as simply buying shares of a stock. As such, mutual funds are the best way to take advantage of the commodity resurgence. However, with thousands of funds from which to choose, finding the right fit can be a bit like trying to find a needle in a haystack.

Not All Funds Are Created Equal

Many commodities are on the rise, but picking a broad-based mutual fund might not be your best bet. Commodity funds tend to be singular entities that either focus on one particular commodity or invest in every type of commodity, making it a challenge to pick and choose baskets at will.

Still, a basket of different commodities is the ideal way to go for investors betting on a commodity recovery. Even if a few commodities are lagging, as long as more are outperforming, then it won’t matter. However, it is important to note that the majority of the broad-basket commodity-based mutual funds have underperformed year-to-date.

Blackrock Commodity Strategies

Blackrock Commodity Strategies (BCSAX) is the definition of broad-reaching. It invests in both commodity-based derivatives as well as equities tied to commodities. Everything from energy and mining companies to agricultural companies are represented in the fund.

BCSAX carries a 1.21% expense ratio, making it relatively expensive, however, its wide diversity in commodities could make it a contender right now. Right now, the fund is invested roughly 23% in U.S. Treasuries, followed by 2.35% in Royal Dutch Shell (RDS-A), 2.15% in BHP Billiton (BHP) and 1.67% in Chevron (CVX).

Despite going up by more than 10% last year, the fund has remained almost flat year-to-date.

ALPS CoreCommodity Management Complete Commodities Strategy Fund

JCRIX invests in a combination of commodity-related equity and derivative securities and comes with an expense ratio of 1.15%. As of March 31, 2018, the fund held 73% in commodity futures with the rest in commodity equities. Amongst its futures holdings, WTI crude oil, brent crude oil and soybeans were the top three allocations with 10.1%, 9.9% and 3.9%, respectively.

Although the fund remained flat year-to-date, it returned more than 11% for the rolling 1-year.

DoubleLine Strategic Commodity

DBCMX invests solely in derivative-backed commodities without investing in physical commodities. The fund can invest more than 50% of its net assets in residential and commercial mortgage-backed securities, with at least 80% of its net assets can be invested in bonds. The expense ratio for the fund is low at 1.16%.

Year to date, the fund is down about 1.59%, although the fund was up more than 15% for the rolling 1-year. Since the fund avoids equity investments, its holding is made up of commodity derivatives in the form of bonds, futures and other asset types.

The Bottom Line

Commodities are gaining back traction and mutual funds provide investors with the best opportunity to profit. Usually, futures are the preferred method of investing in commodities. Alternatively, stocks heavily tied to commodities can offer investors leverage. But mutual funds are an all-encompassing investment product that provides investors with both exposure to commodities as well as professional management. For those looking for commodity exposure, mutual funds are the best way to go.