Last week I updated my own model income fund portfolio in The Tax-Deferred Income Fund Portfolio post. Since then I have looked a bit more into "inflation insurance" vehicles.
In tax deferred accounts in the US, such as IRA's and 401K funds, I still believe that PCRIX or PCRDX is the best choice. PCRIX/PCRDX is Pimco's Commodity Real Return Fund whose collateral base for its broad commodity exposure consists of US TIPS (Treasury Inflation Protected Secutities). So there is a variable cash yield based upon the bond yield and a quarterly inflation adjustment.
Through the end of December 2007 PCRIX paid a trailing 12 month (TTM) dividend of 5.9%, and had total returns for 2007, including those dividends plus all realized and unrealized capital gains, of 23.91%. Due to the taxable dividends and the fact that some unrealized gains in TIPS are taxed under US IRS rules, whether received or not, holding PCRIX makes most sense in a tax-deferred account. PCRIX uses the Dow Jones-AIG commodity Index as the basis for its unleveraged commodity exposure.
Since the costs of PCRDX are 0.5% greater than PCRIX, and it still requires a $5000 minimum to purchase, I have used another approach in one family member's small IRA account. I mentioned HSTRX last week. It is John Hussman's Strategic Total Return Fund which also holds TIPS with shorter maturities/durations than in PCRIX: about 2 years, plus a few other income-yielding securities. HSTRX also holds from 10-20% in gold stocks and varies both this percent and the duration of TIPS according to proprietary valuation models. HSTRX paid dividends of 7.9% (TTM) and had total returns including dividends of 12.66%. For each $4000 of HSTRX in this smaller IRA I bought $1000 of USAGX which is USAA Precious Metals & Minerals Stock Fund. USAGX holds a portfolio similar to Vanguard's same nmed fund VGPMX. I hold the latter in some other accounts but it is closed to new investors
Basically, adding a bit of USAGX to the "mix" with HSTRX gives HSTRX a bit more vigor or "ooomph". USAGX had total returns of 27.80% last year. I could have used one or more of the commodity funds I'll talk about next in place of or in addition to USAGX for the broader commodity exposure that PCRIX has.
The potentially most useful commodity fund is one which went public just last week: The Greenhaven Continuous Commodity Index Fund (GCC). The Continuous Commodity Index (CCI-TR) is maintained by Reuters,and its history is a grand one in US-based commodity history. CCI-TR is the successor of the famous Commodity Research Bureau's futures index of all US exchange traded physical (non financial or currency) commodities. It's the old and revered CRB Index in new clothes.
The CRB Index goes back at least into the 1940's, so there is a long daily data series for price research. CCI-TR. " The CCI-TR is an equal weight basket of the following 17 commodities: wheat, corn, soybeans, live cattle, lean hogs, gold, silver, platinum, copper, cotton, coffee, cocoa, orange juice, sugar, crude oil, heating oil, and natural gas. Each commodity is assigned a 5.88% (1/17) index weight and rebalanced daily. The CCI-TR is calculated daily according to the daily changes in the CCI spot index, the roll yield implied by rolling selected commodity futures forward to the next defined commodities contract on specific dates, and the 90-day T-Bill yield for a single day. The index uses a system of averaging all futures prices six months forward, up to a maximum of five delivery months per commodity." So this index is like the equal weighted SPX for stocks wherein each of the 500 stocks makes up 1/500 of the total, as opposed to the capitalization-weighted SPX. During inflation, most commodities will go up although not all at the same time. So this gives broader exposure and perhaps lower volatility due to equal weighting.
GCC's first day of trading was Thursdsay, and it only traded 21,000 shares on Friday. Start up expenses also may impact initial earnings. I have not yet read the entire prospectus, which one should ALWAYS do before buying any fund. There may be some "give back" by Greenhill in the first months or year to neutralize the start up costs. This is quite common in new funds. Many index data vendors carry either the CRB or CCI-TR index intra-day. If I get into buying it soon, and I'm leaning that way, given the low start up volume, I'll sure try to get an intra-day percent change on CRB or CCI-TR indexes and put in limit orders for an appropriate GCC price.
There are several other commodity ETF's or ETN's which use different commodity indexes and which have been around longer:
DBC includes the six most liquid trading world commodities: gold, aluminum. crude oil, natural gas, corn and wheat.
GSG is heavily weighted to energy futures. "The GSCI is made up of 24 futures contracts and is primarily an energy play with 74% of the portfolio invested in oil and gas," wrote SmartMoney in September 2006.
DJP uses the same Dow Jones-AIG commodity index used by PCRIX, so one can see the value added by PIMCO's underlying TIPS. But in a taxable account one may not want the income dividends or tax reporting hassle of TIPS, so DJP would be a good choice in that situation.
On the chart I have GSG, DBC, DJP, HSTRX, USAGX and VGPMX and their total returns since July 2006 only because GSG only then began to have coverage in my data base. Also in the chart we see that HSTRX has much lower volatility (day to day price variation) and compared pretty well to the others for that period. Over long periods of time DBC, DJP, and PCRIX have far out-performed HSTRX. But I really like the low volatility in all of my income funds, so I really like HSTRX for smaller tax-deferred accounts I oversee. In those family retirement income accounts I am hedging only with 5-15% of total funds devoted to these funds mentioned.
There are, of course, many other ways to hedge or to bet on inflation. I have limited myself here to simple and affordable ways to hedge income portfolios against inflation in a modest way. Of course, using balanced and stock funds in an income fund is also an inflation a hedge in the long run.
Morningstar.com is a good place for basic looks at most US mutual funds, and ETFconnect.com does the same for ETF's, ETN's, and managed closed end funds. If you use a search engine you will turn up a great many other information sources.
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