Archive | Commodities

Tim Pickering on Managed Futures, Part 2

Here’s part two of my interview with Tim Pickering, president of Auspice Capital Advisors, who manages both the Horizons Auspice Managed Futures Index ETF (HMF) and the iShares Broad Commodity Index Fund (CBR). You can read part one here.

Managed futures has traditionally been a hedge fund strategy, used mostly by institutions. Can it really be adapted for the retail ETF investor?

TP: All we’ve done at Auspice is said, this is what we do in our alpha program. It’s been around, it’s got a great history. So what are we are willing to make transparent by putting it in an index? How far are we willing to lift the kimono? Can we do that with an ETF-like price? We started talking about that years ago and people thought we were out of our minds. Nobody has done this before, and we are definitely getting a lot of eyebrow raising—that’s a polite way of putting it.

When it became known that we were publishing these broad commodities and managed futures indexes, I got a call from the CEO of a major company in Canada that has a managed futures program.

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Tim Pickering on Managed Futures, Part 1

On Monday I wrote about managed futures, a strategy that can add a layer of diversification to a traditional portfolio of stocks and bonds. Tim Pickering, president of Auspice Capital Advisors, manages both the Horizons Auspice Managed Futures Index ETF (HMF) and the iShares Broad Commodity Index Fund (CBR). I recently had a chance to interview Tim about these ETFs and the strategies they use. Here’s part one of our discussion. I’ll run part two on Friday.

I’ll start by asking you to simply explain what managed futures are.

TP: The general thesis of managed futures is trend following. We’re looking to capture trends by going long and short in the underlying futures. We are “direction agnostic,” which means it’s our job to capture the trend whether the market is going up or down. One of the most important points is that we are making these decisions based on quantitative measures, without regard for market fundamentals. That’s a key piece of the puzzle, because in order to be agnostic about the markets and to generate non-correlated returns, we need to be fundamentally non-biased.

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What Are Managed Futures?

One of the most difficult tasks in building a portfolio is finding asset classes that do not move in lockstep with stocks or bonds. Non-correlation—the tendency of an asset class to move independently of others—lowers a portfolios volatility, but it’s elusive.

Perhaps the most promising candidate is commodities: according to Larry Swedroe’s The Only Guide to Alternative Investments You’ll Ever Need, from 1973 through 2007 the S&P GCSI Commodities Index actually had negative correlation with US stocks, international stocks, and US Treasuries. That means they tended to zig when other asset classes zagged. Yet in 2008, commodities plunged along with all other risky assets.

However, a related asset class thrived during that crisis: managed futures. This term refers to strategies that trade commodity futures in an attempt to deliver positive returns in both up and down markets. (Many also include trading futures in currencies and interest rates.) Traditional commodity ETFs such as the iShares S&P GSCI Commodity-Indexed Trust (GSG) simply hold long positions in various crops, metals and energy products, and if commodity prices fall, so does the value of the fund.

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Is Gold a Hedge Against Inflation?

In series of posts last week, I looked at Harry Browne’s Permanent Portfolio, which includes a hefty 25% allocation to gold. The reason for holding such a large amount, Browne argued, is that gold protects investors from the ravages of inflation.

The problem with this idea is that there’s no evidence that the price of gold is highly correlated with inflation—at least, not in Canada. This is one of those pieces of conventional wisdom that just doesn’t stand up to scrutiny. Gold has held its value when individual curencies have collapsed, like in Weimer Germany in the 1920s or more recently in Zimbabwe. But those are examples of catastrophic hyperinflation, which leaves people pushing around wheelbarrows of cash to buy a loaf of bread. I don’t think that’s what most people mean when they talk of gold as a hedge against inflation in their portfolio.

You can see how the idea developed in the 1970s. Inflation in Canada averaged almost 9% from 1970 through 1982, and gold would have provided an enormous safety net during this period: its annualized return (in Canadian dollars) was over 25% during those 13 years.

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Claymore’s CGL: When Buying Gold Isn’t Enough

In Monday’s post, I answered a reader’s question about the iShares Gold Trust, an ETF that is cross-listed on the Toronto and New York Stock Exchanges with the ticker symbols IGT and IAU, respectively. I explained that while it is possible to buy and sell this product in either US or Canadian dollars, neither version gives you any exposure to currency risk. However, that’s not the case with the Claymore Gold Bullion ETF (CGL), which also tracks the price of the yellow metal by holding gold bullion. CGL is unique among gold ETFs in that it uses currency hedging.

It’s worth pausing to think about this concept. As most index investors know, it’s common for funds that hold foreign stocks or bonds to hedge their currency exposure to protect Canadians from the effects of a rising loonie. But gold is not a foreign-denominated asset, like shares in Coca-Cola. Yes, its price is widely quoted in US dollars, but that’s not the same thing. Think about it this way: if you were buying gold bullion from the Royal Canadian Mint,

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Ask the Spud: iShares Gold Trust

Q: The iShares Gold Trust (IGT) trades on the Toronto Stock Exchange, but I can’t find it on the iShares Canada website. Can you tell me why? — Jim O.

The iShares Comex Gold Trust is an exchange-traded product that tracks the price of gold. Like its competitor, SPDR Gold Shares (GLD), the trust is backed by gold bullion held in a vault by a custodian.

But although IGT is listed on the Toronto Stock Exchange, it is not a Canadian product. It’s simply a cross-listing of the iShares Gold Trust (IAU), which is domiciled in the US and traded on the NYSE. That’s why it isn’t included on the iShares Canada site.

If you’re not familiar with cross-listing, it’s a common practice among large corporations that want their shares to trade in more than one currency (and sometimes more than one time zone). For example, while Research in Motion is a Canadian company traded on the TSX, you can also buy its shares in US dollars on the NASDAQ. There are many other examples of companies with dual listings,

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Tracking Errors on Bond and Commodity ETFs

The table below shows the tracking error of Canadian bond and commodity ETFs in 2010.

To make sure you understand these numbers in their proper context, see my earlier post on tracking errors for Canadian equity ETFs.


Broad bond market

iShares DEX Universe Bond

TD Canadian Bond index – e-Series

TD Canadian Bond index – I-Series

BMO Aggregate Bond

Claymore Advantaged Canadian Bond

iShares DEX Long Term Bond

iShares DEX Short Term Bond

Government bonds

iShares DEX All Government Bond

Claymore 1-5 Yr Laddered Gov’t Bond

BMO Short Provincial Bond

BMO Short Federal Bond

BMO Long Federal Bond

BMO Emerging Markets Bond *

Corporate bonds

iShares DEX All Corporate Bond

Claymore 1-5 Yr Laddered Corp Bond

BMO Short Corporate Bond

BMO Mid Corporate Bond

BMO Long Corporate Bond

Real-return bonds

iShares DEX Real Return Bond

BMO Real Return Bond


Claymore Gold Bullion

Horizons BetaPro COMEX Gold

Horizons BetaPro COMEX Silver

Horizons BetaPro NYMEX Crude Oil

Horizons BetaPro NYMEX Natural Gas

Claymore Natural Gas Commodity



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Rick Ferri’s Take on Gold

I recently had the privilege of interviewing Rick Ferri, founder of Portfolio Solutions, an investment management firm in Troy, Michigan. Rick is the author of several excellent books on ETFs, index funds and passive investing, including one of my favourites, All About Asset Allocation (McGraw Hill, 2010), which has just been released in a second edition.

One of the issues Ferri and I discussed was the outrageous popularity of investing in gold. SPDR Gold Shares (GLD) is now the second-largest largest ETF in the world, with more than $56 billion (US) in assets, something that would have been inconceivable five years ago. One of the most common reasons people give for buying gold is that it offers security in the event of financial or economic catastrophe. Here’s Ferri’s take on that logic:

“Everybody is putting their money into GLD. But it’s a piece of paper: they are not going to issue you gold bars. If the banking industry collapses, how are you going to get your gold? If Armageddon comes along you might say, ‘That’s OK, because I own gold.’ But you don’t own gold,

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Adding Gold to Your Portfolio

Unless you’ve been in a coma, you know that gold has been the hottest commodity of the last decade, quadrupling in value since 2000. That’s in US dollars, but even measured in loonies gold is up more than 164% over the last ten years.  Those are impressive returns during a period when investing in stocks often felt like feeding cash into a paper shredder.

Claymore’s Gold Bullion ETF (CGL) began trading on the TSX on Tuesday, giving even Couch Potatoes an easy way to invest in physical gold. Is it time to add some of the shiny metal to your portfolio?

Let’s consider the main arguments in favour of investing in gold:

It’s a hedge against inflation, and it retains its value even if a nation’s currency becomes devalued.
Unlike stocks and bonds, gold has virtually no risk of becoming worthless. That makes it a safe haven in the event of financial Armageddon.
Gold is not highly correlated with stocks, bonds or real estate, so it plays a diversification role in a portfolio.
Gold’s price tends to move in the opposite direction of the greenback. This can protect Canadian investors who hold securities denominated in US dollars,

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