40% In Commodities? What?

Barron's had an interesting article about a BofA study showing that over a period of many decades an asset allocation of 60% equities/40% commodities outperformed an allocation of 60% equities/40% fixed income by 0.80% per year. You might expect a tradeoff of having to take on more volatility for that extra return but the article didn't really dig in beyond noting bonds tending to be less volatile. 

I got similar results plugging a 40% allocation into the revamped Portfoliovisualizer which only goes back for ten years on the free tier. The CAGR for 60% domestic equities/40% Invesco DB Commodity Tracker (DBC) was 8.86% versus 7.42% for Vanguard Balanced Index Fund (VBAIX) which is a proxy for a traditional 60/40 portfolio. The standard deviation was 3.5% higher with the 40% allocated to commodities but the 2022 decline was much less at 3.97% versus 16.87% for VBAIX.

I'm pretty sure that I've never put a full 40% into fixed income so 40% into commodities is certainly not going to happen but it's an interesting idea to play around with.

It is surprising how little difference there is in terms of CAGR and even standard deviation between the three which were all superior to VBAIX over a decent timeframe. 

An article at Vettafi about alternatives sent me down a short rabbit hole into GlobalX' lineup. I haven't looked in awhile I guess but yowza, a lot of option-centric funds. So a quick look at the Global X S&P 500 Tail Risk ETF (XTR) which owns the S&P 500 with a put option overlay and the GlobalX S&P 500 Risk Managed Income ETF (XRMI) which owns the S&P 500, sells a covered call, buys a put and has a very high "yield."

XRMI actually compounds negatively but didn't spare too much pain in 2022. The way the put overlay is implemented in XTR results in a pretty noticeable lag of plain vanilla S&P 500 but the protection from the puts only saved holders 51 basis points of downside in 2022. I threw in a simple, build it your self blend of 95% Vanguard S&P 500 (VOO) and 5% client and personal holding BTAL which had the best CAGR, 304 basis points better than XTR. It also offered a little more protection in 2022 than XTR by 138 basis points. The VOO/BTAL blend seems like the more effective way to capture the exposure. 

The point is not to run out and put 95% in VOO and 5% in BTAL but to consider building the exposure yourself. Right or wrong, I would say blending a plain vanilla with whatever alt or combo of alts is simpler than buying it all in one wrapper. 

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