Selecting the commodities component of my portfolio was by far the most difficult of the six asset classes. Broad commodity ETFs and ETNs exist, but they generally have two features that make them unsuitable for tracking commodities prices. The first problem is that the weighting of the commodities that comprise the index can change at the whim of the issuing company. This means that the ETF is essentially tracking a different basket of commodities each time the components change. Secondly, most of the ETFs are too heavily weighted towards crude oil and its derivative products (gasoline and heating oil). For example, DBC, a broad commodities ETF, has a petroleum weighting of 49.5% versus 22.5% for agricultural products.
Jim Rogers highlighted this issue in his outstanding book, “Hot Commodities“.
If fact, Rogers created his own suite of commodity ETNs, RJA, RJN, RJI, RJZ, that reflect his view of a proper construction of commodities indexes. I decided not to use RJI due to my concerns about the viability of ETNs. However, I did use the weighting scheme of RJI as a guide in constructing my own mix of ETFs.
Gold is probably over weighted. Originally, I planned to use DBC:DBA:GLD:SLV, 12:5:1:1, but this would have caused me to trade an odd lot of GLD. In the future, I will add SLV. Note that “other” refers to softs and meats.
The 3 ETFs that I chose are all very liquid, thus there are no issues in shorting them. Additionally, their component weightings are stable.