commodity or commodity ETF question

[Ready-4-ER-at-14]

I was thinking about commodity type exposure maybe getting a commodity ETF and was checking the forum here for a thread and it listed a thread that was 485 days old and site suggested I start a new one rather than adding to it.

I've been simplifying things and finally got the limited partnerships out of my taxes finding that the tax forms often came way after I had filed and were often modified even when I got them. I'd like to file asap this year as it will reduce our Medicare costs significantly when applied.

As I was reading about commodity ETFs I found that there were many tax situations for them. Some of them seemed to be taxable or potentially taxable even in an IRA or ROTH IRA. Some of the ETFs seemed to do the taxable portion is a foreign subsidiary which affected and simplified the taxes for US customers.

Does anyone use them or something else for commodity exposure and can suggest some without tax complications or delays.

 

[yakers]

Interested in any responses, I don't have an idea how commodities would fit in an AA. Do you hold a specific % of an AA and rebalance to capture diversification benefit? AFAIK they do not pay dividends and I wouldn't know when to trade them. I would like as asset to have a buy & hold benefit. I understand them as a hedge for producers/consumers as insurance but not as a financial investment. Still a LOT of money is invested, made and lost in commodities and I would love to know how to capture some of it.

 

[yhoomajor]

I personally use XLB (materials). It covers materials side of commodities so not very broad. No schedule k(s) to deal with.

 

[ziggy29]

One thing to watch for is that some of them could generate a K-1 form, which can be a hassle and delay tax filing. Other than that, I don't have a problem with 3-5% of an asset allocation going to commodities as an inflation hedge.

 

[Ready-4-ER-at-14]

Yes, ziggy29 I had read about the k-1s by some of them, which is what I am also trying to avoid. I had hit a mental fog about which number was associated with the k so took the lazy way out and got general about what i was trying to avoid. (knew for sure it was not k-9 woof : ) ).

Regarding yakers question about how much I was thinking more about just throwing some fixed income that was coming due with no preplanned use at it. I was looking at it as a possible inflation hedge that was less politically influenced than say TIPS. Probably no more than 3% for me.

Ty yhoomajor for a specific fund name (XLB). I'll check into it.

 

[gcgang]

Rio & bhp.

 

[all4j]

If commodities/commodity etfs are the right medicine for this, beware possible side effects! Devil in the details for sure. To get the inflation hedging, you may have to sacrifice income/price appreciation in the absence of inflation. Gold -- in various forms -- may provide better hedging than a broad commodity index, but I can't say it would be less politically influenced than tips. Historical commodity performance should be viewed skeptically as things have changed in this area from past

 

[JT90505]

I found the below link to a Vanguard White Paper worth reading. Basically Commodities perform best (vs. stocks/bonds) in response to *unexpected* inflation.
https://advisors.vanguard.com/insights/article/IWE_InvResHwCmdtsStTIPSCmbtInfl

Presumably TIPS political influence refers to the Fed bond purchases; if so, TIPS held to maturity will have returns that match inflation plus the coupon with no political influence. Of course, in todays world you have to pay a premium for TIPS resulting in a negative real return.

 

[Golden sunsets]

We use XLB in our taxable and PRNEX in our IRA'S. I'd love to find an index fund for a "Broad Commodities Index Fund" which has a lower expense ratio than PRNEX. XLB is not broad enough. Our AA for Commodities is 5%.

 

[BeachOrCity]

One needs to distinguish between commodities themselves which is generally investing in futures of the specific commodity vs investing in a commodity producer like Oil production, coal miner, copper miner etc.

These producers have been very unloved for close to 10 years now and valuations are quite low in many areas. Some quickly went boom and back down to more reasonable levels like lumber. Others many say have room to run like Oil.

While you can do an etf, I think you need to hunt and find the plays where demand will continue and supply isn’t easily increased without large amounts of capital and time.

Company’s trading for just a few years worth of cash flow are not hard to find.