A Unique Approach to Commodities Investing

MarketsETF Trends

This article was originally published on ETFTrends.com.

Commodities have been receiving renewed attention this year. Fortunately, exchange traded funds make this asset class more accessible to a wider array of investors. The Direxion Auspice Broad Commodity Strategy ETF (NYSEArca: COM) takes an active approach to commodities investing.

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The Direxion Auspice Broad Commodity Strategy ETF, which is nearly a year old, is actively managed and looks to provide total return that exceeds that of the Auspice Broad Commodity Index over a complete market cycle.

The Auspice Broad Commodity Index is a rules-based index that utilizes a quantitative methodology to track a diversified portfolio of 12 commodity futures contracts dependent on the historical volatility of that component and the total index value and is independent of the volatility and position of other components. Each holding is then positioned either long or flat, depending on prevailing price trends.

“Commodities are currently the cheapest they have been relative to the S+P 500 within the last 50 years,” according to Direxion research. “One can make the case that an investment in Commodities might be timely when considering both where they are currently valued, as well as to their historic averages.”

Commodities in COM's index may include soybeans, corn, wheat, cotton, sugar, crude oil, natural gas, gasoline, heating oil, copper, gold and silver.

Among industrial and precious metals, COM is currently long copper and flat gold and silver. In the energy patch, COM is long crude oil, gasoline and heating oil while being flat natural gas. Among agriculture and soft commodities, COM is long cotton and is flat corn, sugar, soybeans and wheat.

With inflation rising, the time could be right to evaluate commodities ETFs, including COM.

“Commodities have tended to perform better during inflationary periods, and more often than not a rising GDP has coincided with higher U.S. Treasury Yields,” said Direxion. “When looking at US. 10 year Treasury Yields over the last 50 years, roughly 80% of those calendar years Inflation and Treasury Yields have moved in tandem. In other words, when GDP increased in a given calendar year that also represented an increase in Treasury yields.”

COM reduces the negative effects of contango and maximize the positive effects of backwardation in the futures market. Expiring futures contracts are replaced based on an optimization process that selects a contract from a universe of futures contracts within the next 13 month period.

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