For the final installment of Monevator’s commodities series, I’m going to walk you through my ETF picks for actually investing in this controversial but potentially highly useful asset class.

Of course the recent history of commodities investing has been more troubled than that of an 11-year old arsonist.

We’ve taken four posts just to lay out the pros and cons:

• Part one explained how commodities investing works
• Part two covered commodities’ long-run returns
• Part three examined whether commodities enhanced portfolio returns
• Part four investigated whether commodities really are a good inflation hedge for UK investors. [Members post!]
  

While reasonable minds might disagree on this one, my own conclusion is investing in broad commodities offers me portfolio diversification advantages I can’t get elsewhere. 

And now that I’ve researched the available commodities ETFs, I’m satisfied I should be able to pick up a product that can capture the benefits of the asset class, too.

I’ll dive into those details further down.

But first let’s run through my candidates for the best commodities ETFs.

The best commodities ETFs that I can find

My top pick is the nattily named: 

UBS ETF (IE) CMCI Composite SF UCITS ETF (USD) A-acc

• Ticker: UC15
• ISIN: IE00B53H0131
• Index: UBS Constant Maturity Commodity Index
• OCF: 0.34%
• Launched: 20 December 2010
• Domicile: Ireland
• Replication: Synthetic 
• Cumulative nominal GBP return: 18.3% (20 December 2010 to 6 July 2023)

This is the ETF I’m going to invest in. 

My alternative choice is:

L&G Longer Dated All Commodities UCITS ETF

• Ticker: CMFP
• ISIN: IE00B4WPHX27
• Index: Bloomberg Commodity 3 Month Forward Index
• OCF: 0.3%
• Launched: 18 March 2010
• Domicile: Ireland
• Replication: Synthetic 
• Cumulative nominal GBP return: 9.4% (20 December 2010 to 6 July 2023)

Both these broad commodities ETFs track an index that’s locked on to the fortunes of energy, agriculture, livestock, and industrial and precious metals futures contracts. 

That’s a mouthful but it’s what we want to see. (We covered the particulars in a previous commodities investing post.) 

Essentially, we want exposure to a diversified range of commodities futures. That’s exactly what we get with these two ETFs. 

Here’s the battle of the commodities index trackers across the maximum comparable timeframe:

Source: justETF.

UC15 (red line) comes in comfortably ahead of CMFP (blue line) with a cumulative return of 18.3% compared to 9.4%.

Though do note the -45% cumulative return chalked up by 2016!

UC15’s better overall return makes it my top pick. But as you’ll see shortly there are reasons you could choose CMFP instead.

There’s certainly no guarantee that UC15 will continue to beat CMFP in the future.

Why did I choose these commodities ETFs?

My main criteria for my best commodities ETF choices are that they:

• Track an index that can capture the benefits of the asset class
• Have a good long-term track record (relative to mainstream commodities benchmarks)
• Have a reasonably low cost
• Don’t do anything weird (relative to other broad commodities trackers)

My top two picks tick all those boxes. 

I started with the universe of London Stock Exchange broad commodity ETFs listed on justETF, excluding currency-hedged ETFs. As with equities, I want the currency risk associated with commodities (which are denominated in US dollars). 

My next stop was to establish which ETFs are doing a decent job of capturing the benefits of the broad commodities market. 

My benchmark here is the Bloomberg Commodity Index (BCOM). This is the contemporary version of the investable index I’ve used throughout this series to establish that broad commodities are a worthwhile long-run investment.  

(The other well known commodities index is the S&P GSCI, but not a single European ETF tracks it.)

Now, commodities have endured a terrible bear market for most of the period these ETFs have been around. So prepare for your drooling chops to dry when I start bandying around numbers. 

Remember we’re here because future expected returns for commodities are estimated to be 3.5% to 4% (annualised real total returns). And because the historical real GBP returns are 4.5% annualised over the past 89 years – trouncing any other asset class that can diversify our equity returns.  

Long-term track record

We want our commodities ETF of choice to have matched or beaten the BCOM total return index over the longest possible timeframe. 

Both of my top picks launched in 2010, so that’s plenty of time to ascertain whether they work or not. 

For comparison, the BCOM total return index delivered a stonking -2.8% nominal cumulative total return (GBP) from 2011 to 2022. (Take me home, mama!)

• UC15 earned a 26.7% cumulative return over that period 
• CMFP earned 21.08%

The point is both ETFs smashed the BCOM return over 12 years. 

Which brings me to the next key point…

Your commodities index matters

When you pick a global tracker fund, the index matters, but not that much – just so long as it’s a reputable global equities benchmark. 

However we can’t be so complacent with our broad commodities index. 

Broad commodity indexes are divided into first generation, second generation, and – oh happy day – third generation iterations. 

Second- and third-gen indexes fix some of the known problems with first generation indexes.

Yet the two most popular benchmarks (BCOM and S&P GSCI) are both first-gen originals. 

Antti Ilmanen sums up why this commodity index innovation has been a positive in his book Expected Returns on Major Asset Classes:

Nonetheless, the changes made in the new indices appear a priori reasonable: less weight in the energy sector; changes in roll schedules (because monthly rolling from nearby to second contract according to the S&P GSCI’s schedule puts one-sided pressure on market prices and causes temporary price distortions that other traders can exploit or avoid); and, increasingly, a shift from holding only the most liquid nearby futures contract toward including a basket of deferred contracts. 

That last point is particularly important.

Because first-gen indexes only track the most liquid short-dated contracts, their returns typically suffer in contangoed markets. 

Some second-gen indexes mitigate the problem by including contracts further along the curve. 

The indexes followed by both UC15 and CMFP use this technique. And these ‘curve management’ strategies actually work, according to Adam Dunsby and Kurt Nelson in A Brief History Of Commodities Indexes:

By distributing positions across the curve, investors have mitigated this impact and achieved higher returns.

Clearly this approach has paid off for UC15 and CMFP as they’ve both easily outperformed the first-gen BCOM index since launch. 

You’ve been contangoed

Sadly, we can’t assume the second-gen indexes will always win. As Dunsby and Nelson explain, UC15’s second-gen UBS CMCI index is better in certain conditions:

When contango is more pronounced in the front end of the futures curve, as is typically the case for, say, corn and has recently been the case for crude oil, then these indexes will outperform the first-generation indexes. When futures markets are backwardated, and the backwardation is concentrated in the front end of the curve, then these indexes will underperform the first-generation indexes.

As for CMFP’s BCOM 3 Month Forward index, Dunsby and Nelson say:

The DJ-UBSCI [BCOM] 3 Month Forward takes a different approach. It invests in the commodities contracts that the traditional DJ-UBSCI would hold three months from now.

This feature places all the DJ-UBSCI F3 contracts farther out the futures curve, and since futures curves tend to be flatter as tenor is extended, the effects of backwardation and contango tend to be reduced. 

The market tends to switch between backwardation and contango, but contango has dominated returns over the period since most commodity ETFs were launched. 

The risk in plumping for UC15 is that we end up kicking ourselves as a golden age of backwardation inevitably follows, simply because we tried to outwit fate. 

Neuroticism aside, the more even-handed approach of CMFP could make sense, despite its less impressive overall return, given that predicting the futures curve is well above our paygrade. 

Finally on indices, just in case you’re wondering, Rallis, Miffre, and Fuertes say in Strategic and Tactical Roles of Enhanced-Commodity Indices:

Our findings suggest that the enhanced indices retain the risk diversification and inflation-hedging properties of the traditional S&P-GSCI and DJ-UBSCI [BCOM index]. 

Commodities ETF alternatives

There is a cheaper way than CMFP to track the BCOM 3 Month Forward Index – namely Xtrackers Bloomberg Commodity Swap UCITS ETF 1C, or XCMC for short. 

XCMC’s OCF is only 0.19%, versus 0.3% for CMFP.

The reason I haven’t given XCMC the nod is because it only launched in November 2021. 

That said, the two ETFs have been neck-and-neck over the 20 months XCMC has existed. If you don’t mind a short track record, then choosing XCMC on cost grounds looks reasonable as so far it’s hugging its index as effectively as CMFP.

Elsewhere, Xtrackers Bloomberg Commodity ex-Agriculture & Livestock Swap UCITS ETF 2C (XBCU) actually pipped UC15 in a dead-heat for the period 2011 to 2022.

Personally, I don’t want to exclude agriculture and livestock. But if you do then this is the ETF to consider. It follows the Bloomberg ex-Agriculture and Livestock 15/30 Capped 3 Month Forward index. 

The UBS ETFs (IE) Bloomberg Commodity CMCI SF UCITS ETF (USD) A-acc (UD07) looks promising but it only launched in 2017. This ETF follows a slightly different 2nd-gen constant maturity index from UC15. 

Amundi Bloomberg Equal-weight Commodity ex-Agriculture UCITS ETF Acc (CRBL) is a contender and the only broad commodities ETF available that tracks an equal-weighted index. However, the ETF changed its benchmark in January 2023 making it difficult to know whether its long-term returns are still relevant. 

I passed on the Invesco Commodity Composite UCITS ETF Acc (LGCF) for the same index tinkering reasons. 

Finally, if you want a first-gen index tracker then check out Market Access Rogers International Commodity UCITS ETF (RICI). It’s consistently outpaced BCOM since 2007. 

Of course, you could always divide your commodities’ allocation between a couple of meaningfully different approaches.

You could split your money 50:50 between a first-gen and second-gen ETF.

Or between a second-gen and the equal-weight ex-agriculture option. Academic research into commodities futures shows that equal-weight indexes have historically outperformed their first-gen counterparts.

It depends on your tolerance for portfolio complexity.

Commodities ETF mop-up

ETFs are not covered by the FSCS investor compensation scheme, although you’d still be eligible for support if your broker went bust. 

If you invest outside of your tax shelters then make sure your commodity ETFs have UK reporting fund status. Otherwise capital gains will be taxed at your marginal rate of income tax. 

If an ETF’s assets under management (AUM) are worth less than $100 million a couple of years after launch, then it may eventually be closed down or merged with another fund. 

That doesn’t mean you lose your money, but it can leave you out of the market for a while, or trigger a tax event – potentially annoying if you’re investing outside an ISA or pension. 

Note that my top two ETFs are both comfortably over $100 million in AUM. 

Commodities ETFs don’t pay dividends but they do reinvest interest earned on collateral. Consult a tax professional if this concerns you. 

I haven’t looked at funds that invest in commodity stocks because they are highly correlated with the broader equities market. You need to invest in broad commodities ETFs to get exposure to the diversification benefits we’ve examined in this series. 

Swap shop

Commodities ETFs use total return swaps to track their indexes. A total return swap is a derivative, provided by a third-party who undertakes to pay the ETF the return of the index (minus costs).

This arrangement means commodities ETFs don’t actually invest in futures contracts, never mind shipments full of lean hogs, bales of cotton, or barrels of oil. 

Index trackers that use total return swaps are classified as synthetic ETFs and it’s as well to know what that entails. 

In reality, each synthetic ETF’s holdings amount to a basket of securities that have nothing to do with commodities and are held as collateral. This is standard practice.

The collateral is there to cover investors against counterparty risk – the chance that the swap provider fails to pay out during some kind of financial crisis. 

On that basis, make sure to check that your chosen ETF’s website indicates the tracker is backed by collateral worth at least 100% of its market value.

Commodities ‘coaster

Broad commodities had an awesome 2021 and 2022. But the asset class is hovering around correction territory (-10%) so far in 2023. 

If that gives you the heebie-jeebies then commodities are not for you.

They suffer equity-scale volatility and can spend years – even decades – underwater. 

Eruptions into positive territory can be brief but spectacular, like watching the geyser Old Faithful blow its spout in Yellowstone Park. 

But there’s no point investing in commodities if years of negative returns turn you into Old Unfaithful – ditching your holding and so failing to collect when returns sky rocket. 

Personally, I’m still nervous about commodities. But I’ve been persuaded by the long-run data that shows the asset class can work when others fail. 

For this reason, I’m going to take the plunge now I’ve homed in on a couple of commodities ETFs that look up to the job. 

That said, I will proceed cautiously. I’ll start by switching a few percentage points of asset allocation, then build up my position slowly over the next couple of years, or whenever the market takes a downward lurch.

With commodities – more than my other asset classes – I want to minimise any early regrets, get comfortable, and then hunker down for the long-run.

Take it steady,

The Accumulator

More ETfs for fun and profit:

• For other asset classes check out our cheapest trackers guide
• Our best global equity trackers suggestions
• Here are our best bond fund choices

What caught my eye this week.

You won’t find anything more ridiculous, than this new profile
Razor unit, made with the highest British attention to the
Wrong detail, become obsolete units surrounded by hail.

The Classical – The Fall

A side theme of this blog over the past few years – much more in these weekend rambles than our investing articles – is that Britain is not the super-rich country it’s been acting – and voting – like it thinks it is.

Not as experienced by the average Briton anyway.

It’s not only me. Contributor Finumus believes the same. The Accumulator largely keeps politics out of his articles as much for his blood pressure as to maintain the peace. And several of our most respected regulars in the comments have made the same point.

In his article Britain is a developing country this week, Sam Bowman marshals a few salutary facts:

• By GDP per capita, adjusted for purchasing power, the US ($76,399) is 39% richer than the UK ($54,603). GDP growth since 2010 has been 47% faster – nine percentage points – in the United States (28% growth) than the UK (19% growth), despite being from a much higher level.
• By productivity, or how much we produce per hour worked, the US was 38% more productive than the UK (UK $54.3/hour, USA $73.7/hour) in 2019.
• France / Germany were much closer to the US than to the UK at $69/hour.
• Between 2010 and 2019, productivity growth was twice as fast in the US (8% growth) as the UK (4% growth).
• Americans could stop working each year on September 22nd and they’d still be richer than Britons working for the whole year.
• Or, as Mike Bird pointed out, a car wash manager at an Alabama Buc-ees, a chain of gas stations and grocery stores, earns more ($125k/year) than THREE median UK salaries.
• The average starting salary for a newly-qualified nurse in the US is over £42,000, compared to only £27,000 in most of England, and the gap only widens as their careers progress.
• UK real disposable incomes are not forecast to return to 2021 levels until 2027.

Read Bowman’s piece to hear what he thinks we should be doing it about Britain’s semi-stagnation.

Spoiler alert: it’s nothing like what we have been doing for the past seven years.

Anglosceptics anonymous

I don’t agree with all that ex-Adam Smith Institute director Bowman writes, though his dour prognosis on the economic consequences of Brexit in 2017 pretty much mirrored mine.

In particular I’m more concerned about the consequences of fossil fuel burning than he appears to be here, though I seem to recall he sees cheaper energy today as a faster path to us being rich enough to afford a renewable grid. (I might be misremembering).

Also Bowman’s bullet point drive-by comparison would be even deadlier if it didn’t focus so much on the US. The 20th Century was the American Century. With its tech company dominance over the past 25 years, who’s to say the 21st won’t be too? It’s an unrealistic benchmark for Britain.

Still, it’s refreshing to read a right-of-centre summary that mostly describes Britain in 2023 as I would. Seemingly ex-growth, in the jargon of stockpickers, and possibly a value trap.1

Things can always get better. But change starts with admitting that we – especially the young – have a problem.

Have a great weekend!

[continue reading…]

1. I mean big picture Britain here, not the London stock market. Despite a little bounce over the past few days on lower inflation and a weaker pound, for the very little it’s worth I agree with those who think the UK market looks relatively cheap. [↩]

Where were you on 9/11? Do you remember when you first heard that Princess Diana had died?

What about when you truly realised what compound interest could do for you?

I know that I was in a Waterstones in Bayswater in London, browsing a book by – I think – Jim Slater.

I almost dropped it in shock when I saw the future.

Admittedly this ultra-niche appeal anecdote would be punchier if I could be certain which book of Slater’s I was reading– or even be sure that he was the author.

The truth is I’m not even confident what year it was.

Mid-to-late 1990s – and perhaps more ‘late’ than I’d like to concede. Me still in my 20s, just, thinking I knew it all but regularly getting my ideas turned upside down.

All that I remember very well.

Double Maths at A-Level, but it took a graph in a book and a few small numbers in an equation to show me a way that I hadn’t come up with myself.

Golden retrievers

Given that on every second date I go on the term FIRE comes up these days, I expect it will be hard for younger readers to believe there was a time when you had to ferret out this information for yourself.

No blogs, no YouTube, no financial Twitter or TikTok. No ‘finfluencers’. Nobody in your extended family who didn’t work until they were done unless they had kids, sold a business, got sick, or died.

No real-life role models for financial independence – let alone retiring early.

But that was how life was back then. You became interested in a subject and you followed a breadcrumb trail – through libraries, bookshops, the nascent Internet, and word of mouth. At the end might be a musical subculture, an Eastern philosophy, a passion for early Porsches, or maybe some sexual fetish you never imagined existed.

It all took a lot of time but the journey was half the reward.

Today though, it takes about as long as it took me to type “today though” for you to have answers to everything at your fingertips.

Of course you still need to digest the material. And you must be more alert than ever to bogus nonsense. That’s the downside of getting rid of the gatekeepers of yesteryear.

You also need to know the right question to ask – trickier than it sounds when you might not yet have a clue about the answer.

In any event, today’s shortcuts are more like warp zones in Mario than incremental power-ups.

There’s no excuse not to know how to do anything.

House-trained mutts

I suspect this abundant information is one of the frustrations that older people have with the young nowadays.

We – as I suppose I might as well get used to writing – might bemoan that the younger generation’s financial woes are due to avocado on toast or YOLO-ing away a potential house deposit.

But we also think there’s no excuse for them not to know better.

Because everyone can know all this stuff if they want to.

Never mind that ‘we’ have mostly been bailed out by rising house prices, decently well-paid jobs, and for 15 years by the near-absence of meaningful interest rates.

Nor that despite these tailwinds a large cohort of even professional people in their 40s and 50s remain slaves to their credit card debt – or are decades behind on saving for a pension.

And I’m only talking about the sort of people who might eventually cross the path of Monevator, you understand. Not the one in five who have no pension savings at all nor the many millions who would struggle to get their hands on just a few thousand pounds without taking out a loan.

Maybe knowledge isn’t everything, after all?

The dogged pursuit of financial freedom

I was thinking about all this after talking to the very bright son of a friend of mine who I’m convinced is on the brink of making a big mistake.

He’s in his mid-20s and he’s frustrated with “having no money”. So he’s about to chuck in a good thing – in my opinion – and make some massive compromises in the pursuit of more cash today.

I advised him to be patient and to look to the big picture.

As we talked, the memory of my compound interest revelation in the bookstore bubbled up:

“I worked out when I got back home that if I could just save £500 a month for the next 25 years then I’d become a millionaire,” I explained.1

Unusually for a stealth wealther like me, I delivered what I thought was the mic drop:

“So I started saving £500 a month – and I achieved that goal.”

My young disciple wasn’t even fazed though. And I don’t think just because a million pounds isn’t what it used to be.

Turned out he’d heard of Mr Money Mustache. Spent a few hours going down the YouTube rabbit hole. He’d discovered these ideas several years younger than me, as it happened.

“FIRE, sure, yeah. Well you have to have £500 a month to do what you did,” he said glumly, before listing his monthly post-tax income (after, as best I could tell, a mandatory pension contribution), the rent for a room in a shared flat in a grimy bit of South East London, how much he spent in Morrisons on a single visit last week, and what it costs to fill his car.

No, I don’t think he should be driving in London either. But it was hard to argue that he was living it up.

He told me he was thinking of moving back in with his parents.

Barking up the wrong tree

Yes I am the guy who said young people are already rich on account of their long time horizons.

But if they can’t begin to take advantage of that potential, then isn’t their youth a stranded, wasting, and illiquid asset?

I won’t go through the laundry list of ways in which the older generations have arguably been over-enriched and the young given short thrift during the past 20 years.

House prices and insufficient new home building, the cost of higher education, and politicians favouring pensioners covers most of it – with the witless Brexit the icing on the cake.

Have a Google for hundreds of articles on the theme. There are even books on the generational divide.

But I will admit that this conversation gave me pause.

I think I know about all this stuff – yet my instinct had been to lecture this young man about compound interest rather than to truly hear him out.

In the way of a groovy geography teacher I had wanted to sound less like ‘we’ as the older generation when I was talking to him, and more like ‘us’.

But in reality there I was at the front of the class, and he was shaking his head at me not getting it.

In the dog house

What’s the killer takeaway? That I should talk less and listen more? That Britain needs to change its focus to the struggles of young people – especially those without rich parents? That I’m older than I think I am?

All true and maybe there isn’t a big revelation.

I’m pretty confident I could still reach financial independence if I started today. I see abundant opportunities that didn’t exist when I was my young friend’s age. He’s overly pessimistic.

Also, I did enough stupid things on my journey to believe there was a margin of safety. (For instance I never benefited from the long property boom, and I could have made more of my career.)

But honestly? I do suspect it would be harder now. Even if I still think he’s making a mistake.

Plus ça change, plus c’est la même chose and all that.2

This lad has run into the same concept that totally changed my life – and it has bounced right off him.

For all the guidance from blogs, YouTube videos, and social media influencers, every generation’s young people will do what they want and have to, and take their own missteps.

Those of us who went before are going to shake our heads.

And they’ll shake their heads right back at us.

Are you a younger person who thinks financial independence is harder to reach these days, despite all the information charting the path out there? Are you an older person with another perspective? Let’s have a productive discussion between the generations in the comments below!

1. Yes I used an aggressive rate of return back in those days. Somewhere between 12-15% from memory. Which turned out not to be too optimistic for me but maybe that was lucky. It is also not really the point. [↩]
2. The more things change the more they stay the same. [↩]