The question of whether gold, oil and other commodities are appropriate for individual client portfolios has always been a difficult one for financial advisors. So let’s dig into it.
The Invesco DB Commodity Index Tracking Fund is flat year to date as inflation has moderated during 2023 thanks to the Federal Reserve’s aggressive rate hike campaign. That said, over the past five years, the fund has risen nearly 50% as a result of the rise in inflation caused in part by the pandemic. The fund uses futures contracts to invest in light sweet oil, heating, gasoline, natural gas, Brent crude, gold, silver, aluminum, zinc, copper, corn, wheat, soybeans and sugar.
In other words, it’s the hard stuff, and generally the type of asset that financial advisors view as different from plain vanilla stocks and bonds. Macro trading, if you will, and not meant for plain vanilla client portfolios.
But Robert Minter, director of ETF investment strategy at abrdn, doesn’t believe that’s the case. He argues for commodities as a perfectly acceptable part of individual investor portfolios.
“Commodities can go higher or lower based on both demand and supply. And now we have a supply problem. For the last three years, we’ve had a supply problem. And so we have to focus a little less on the macro, a little more on the supply problem,” Minter said.
Brian Hartmann, a partner at Granite Bridge Wealth Management, agrees with Minter and adds a healthy amount of commodity exposure to client portfolios in nearly every market cycle.
“Our advisors take the time to educate our clients on how commodities can help balance their holdings and demystify some of the misconceptions that are often associated with owning this asset class,” he said.
For example, Hartmann said investors often believe gold is a reliable hedge against stock market volatility, when in most cases it is better used as a hedge against inflation and the value of the U.S. dollar. For the record, gold is up 6% so far in 2023 and nearly 60% over the past five years.
Robert Pearl, co-founder and wealth advisor at G&P Financial, uses commodities tactically in client portfolios. In the past, he used gold and broad commodity ETFs as inflation hedges. Currently, he is reducing his exposure to hard assets due to deflationary pressures.
“If gold prices start to go down and the U.S. economy has a mild recession, then I wouldn’t imagine commodity baskets doing well in that kind of environment,” he said.
Similarly, Michael Nakanishi, a financial advisor at Kingswood USA, uses commodity ETFs for clients who are open to the risks associated with commodities. In fact, he has had exposure to oil and gas since 2021.
“As I started to trim that, two wars in oil-producing regions as well as global, especially domestic, growing energy needs provide compelling reasons for continued holding,” Nakanishi said.
NOT DIG IT AT ALL
On the other side of the debate, advisors like Josh Strange of Good Life NOVA prefer not to add commodity exposure to client portfolios. Why? Well, in Strange’s opinion, commodities are “an extremely volatile asset class.”
“Gold has not held up particularly well in the recent inflationary period and really only seems to rally in times of extreme fear of existential crises,” he said.
Similarly, Ted Haley, president of Advanced Wealth Management, said that unless a client has a special interest in adding gold, oil or agricultural products to their portfolios, he generally won’t do it, calling it “speculation rather than investment.” Haley said he would rather invest in profitable and innovative companies when making specific investment choices.
Not that he hasn’t explored the idea of investing in commodities.
“We considered using commodity managers, but as with most actively managed investments, it’s challenging to find managers or strategies that consistently have competitive performance,” Haley said.
Likewise, Jonathan Swanburg of TSA Wealth Management avoids putting commodities in client portfolios for poor performance because they “tend to be expensive and tax-inefficient.”
“Investors interested in long-term exposure to a commodity may be better served by investing in the stocks of companies with exposure to the commodity rather than the commodity itself,” Swanburg said.
If those aren’t enough reasons why a large contingent of advisors regularly walk away from commodities, Scott Bishop of Presidio Wealth Planners has a few more.
“If you own an ETF or ETN that invests in futures contracts within an IRA, you will often receive a K-1 that may include unrealized business tax income. Also, when you invest in futures contracts for longer-term holding, you have the roll- a risk where the price can be different when a contract expires and you go to the next month,” Bishop said.
“Commodities don’t pay a dividend,” he added. “So if you’re wrong about the price movement, there’s no other income.”
So there’s that too.