Where Are The Low-Cost Commodity Mutual Funds?

A decade of volatile financial markets and stock crashes has taken its toll on investors’ psyches.  The motto “Stocks for the Long Run” has increasingly given way to “Stocks Are Too Risky,” which is a shame.  Nonetheless, recent events have given rise to renewed interest in alternative asset classes a la David Swensen, not the least of which is commodities.  So where are all the commodity mutual funds to cash in on all this interest?

Where Are The Commodity Mutual Funds?

It’s nearly impossible to visit a finance-related forum or website these days without encountering a rabid commodities-supporter, which is fine, but I do have one question:  how, exactly, are all these people investing in commodities?  I doubt they are warehousing pork bellies or gold bars, so they must be investing in commodity mutual funds of some kind.  Only problem is, there aren’t many commodity mutual funds out there and the ones that do exist are either overpriced or poorly-constructed.

The granddaddy of all commodity mutual funds, PIMCO Commodity Real Return (PCRDX) leaves plenty to be desired.  For starters, it sports a too-high expense ratio of 1.24% which seems especially expensive for a fund with $13 billion in assets.  Worse, it’s annual turnover is an astounding 979% (high even for a futures-based fund), leading to an exorbitant tax liability.  This fund has lost 4.40% per year over the past 5 years in taxes alone, according to Morningstar’s tax-cost ratio statistic.  That’s insane.

Other commodity mutual funds on the market are little better.  Perhaps the “best” commodity mutual fund is actually an ETF: the DBC PowerShares Commodity Index (DBC).  It sports a (relatively) reasonable 0.83% expense ratio but includes only 6 different commodities, with oil and gold severely over-weighted.  By contrast, many other commodity mutual funds invest in 10-15 or more commodities with the esteemed Rogers International Commodities Index (which sadly is out of the reach of small investors) investing in 36 different commodities.

Commodities have a place in everybody’s portfolio, in theory, but it’s hard to recommend them with the current crop of lackluster commodity mutual funds.  Large institutional investors and wealthy individuals have a distinct advantage in sector of the market.   While I have no doubt investing in commodities will become as easy and inexpensive as investing in stocks and bonds sometime in the future, I can’t for the life of me figure out why it’s taking so long.