Commodities come in several varieties. Therefore choosing the best commodities funds for your portfolio depends upon what you want them to do for you.
From a market timing perspective, commodities funds can be tricky, especially with regard to the biggest commodities story of the moment — the slide in oil prices — that has all the elements of the proverbial peril of “catching a falling knife.”
But don’t forget about that other big commodities story — the recent big jump in gold prices. And then there are also agricultural commodities, which receive less media attention but can be smart additions to a diversified portfolio.
Taking all of this into consideration, combining the diversification and timing elements together, a solid broad basket commodities fund can be a good idea now. The diversity of many different kinds of commodities can potentially capture the eventual boost in commodities prices historically associated with the late phase of the economic cycle, which the U.S. may be entering in 2015.
With that in mind, and in no particular order, here are the three best commodities funds to consider adding to your portfolio now.
Best Commodities Funds to Buy Now: PIMCO Commodity Real Return Strategy (PCRDX)
If you want a commodities fund with a solid combination of skilled management and enhanced indexing, PIMCO Commodity Real Return Strategy (MUTF:PCRDX) can be an excellent choice.
The fund offers broad participation in commodity-linked investing, with enhanced return potential from Treasury Inflation-Protected Securities (TIPS). To capture performance potential of commodities, the fund uses derivative exposure to the broad-based Bloomberg Commodity Index.
Lead manager Mihir P. Worah has put up good numbers in his seven-year tenure for PIMCO Commodity Real Return. Last year when oil declined in value by 50%, the PCRDX portfolio had a -18.5% return.
The year-to-date return of -2.5% places it ahead of two-thirds of other broad basket commodities fund. While the one- and three-year annualized returns are near average, the five- and 10-year ranks are also in the top third compared to category peers.
The expense ratio for PCRDX is average at 1.19% and the minimum initial purchase is $1,000.
Best Commodities Funds to Buy Now: PowerShares DB Commodity Tracking ETF (DBC)
If you want to start buying into the big slide in oil, but take some of the downside risk away with other commodities in a fund portfolio, PowerShares DB Commodity Tracking ETF (NYSEARCA:DBC) is a worthy consideration.
The portfolio consists of just more than 50% oil and gas futures but the remainder of the portfolio includes contracts in other commodities, including gold, corn, soybeans and wheat.
Oil may continue to drag on returns in the short term, but when the downside of oil settles and the U.S. enters the late phase of the economic cycle, DBC could be a good performer for your portfolio.
Looking back to 2007, when the U.S. was in the last calendar year of the last economic cycle, DBC had a price jump of 34.8%, whereas the S&P 500 Index had a muted gain of 5.5%.
The expense ratio for DBC is 0.85%, or $85 for every $10,000 invested.
Best Commodities to Buy Now: Deutsche Enhanced Commodity Strategy Fund (SKNRX)
If you are looking for a top-notch, actively-managed commodities fund, Deutsche Enhanced Commodity Strategy Fund (MUTF:SNKRX) may be the best choice.
The management team uses a quantitative, rules-based methodology to determine the fund’s commodity sector weightings relative to its benchmark, the Bloomberg Commodity Index.
This tactical investment strategy gives the SKNRX management team the ability to increase or decrease market exposure and potentially provide a measure of downside protection when commodities in general appear overvalued.
Past performance is no guarantee of future results but it does demonstrate impressive management skills for navigating the complexities of the commodities market. The one, three- and five-year returns are all comfortably in the top 10 percentile rank compared to other broad basket commodities funds.
Although SKNRX has a front load of 5.75%, the outstanding performance record and solid management can justify such an expense. Some investors may qualify for load-waived shares.
The expense ratio for SKNRX is 1.5%.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.