Commodity and futures trading is highly specialized and is not available through Vanguard. Commodity-based investment poses risks based on a variety of factors, including high volatility and the potential for low returns over extended periods. In a press release, Vanguard said that the fund will offer investors greater portfolio diversification, along with a possible hedge against inflation risk, by investing mainly in commodities and Treasury securities protected against inflation (TIPS). Due to the volatility and vagaries of commodity trading (for example, soybeans and other agricultural products, precious metals, oil and gas and related derivatives), the average price of a commodity fund is around 0.70 percent per year, according to Bloomberg analyst Eric Balchunas.
The fund will be offered in Admiral Shares, with an estimated spending ratio of 0.20%, which represents one-sixth of the average spending ratio of 1.24% of competing funds linked to broad-based commodities. A futures contract is an agreement to buy or sell on a certain date at a predetermined price, so its value generally moves along with the spot prices of the commodity or index. Wall Street has witnessed an accumulation of commodity-linked mutual funds and exchange-traded funds in recent years, in part due to the huge fall in stocks. Investing in alternative strategies, such as the Vanguard Commodity Strategy Fund, provides an opportunity to generate diversification benefits for a balanced portfolio by reducing overall portfolio volatility and improving risk-adjusted returns.
The Vanguard Commodity Strategy Fund will seek to surpass Bloomberg's total commodity return index by investing in commodity derivative investments, such as commodity futures and swaps, guaranteed by a combination of Treasury bills (Treasury bills) and short-term TIPS, which add an additional layer of protection against inflation. VALLEY FORGE, PA (June 25, 2017) Vanguard today launched Vanguard Commodity Strategy Fund (VCMDX) for investors seeking low-cost exposure to the commodity market. The price and value of the product may be affected by changes in general market movements, the volatility of commodity indices, changes in interest rates, or factors affecting a particular industry or commodity. Before investing in an ETP linked to commodities or volatility futures or in any ETP, you should carefully read the prospectus and consider the objectives, risks, charges and expenses of the product.
Commodity markets are volatile and even a small movement in market prices could result in large losses. This process of buying longer-term futures contracts can sometimes be more expensive than simply buying and holding the underlying commodity due to changes in the spot price of the commodity and the amount of time value of the futures contract, a situation known as contango. ETPs linked to commodities and volatility futures may be subject to greater volatility than equity ETPs and may not be suitable for all investors. However, institutions view commodities as a factor of diversification and also as a hedge against short-term inflation, Balchunas said.
To avoid physical possession of underlying commodities, commodities undergo a regular registration process, in which they sell contracts that are about to expire and use the proceeds to buy longer-term futures contracts.