After criticizing the idea, Vanguard to launch low-cost commodities mutual fund, but it ain’t for Mom-and-Pop investors

Local mutual fund giant Vanguard will launch an extremely low-cost commodities mutual fund, but the minimum investment is $50,000.

That’s not generally aimed at retail investors -- and there are good reasons why.

The main driver behind Vanguard’s push into commodities appears to be because of demand from big institutions like banks, insurance companies and other professional investors who might otherwise buy a competitor’s (read PIMCO) commodities fund with a much higher price tag.

Vanguard’s new mutual fund -- filed with the SEC under the name Vanguard Commodity Strategy Fund -- is expected to charge 0.20 percent annually, a bargain-basement price compared with PIMCO’s Commodity Real Return Strategy Fund (PCRIX), which charges a hefty 1.24 percent annual fee.

Because of the volatility and vagaries of trading commodities -- for example, soybeans and other agriculture products, precious metals, oil and gas, and related derivatives -- the average price for a commodities fund has been around 0.70 percent annually, said analyst Eric Balchunas at Bloomberg.

Vanguard’s new fund may also be in response to some low-cost trailblazers in the commodities fund world, particularly GraniteShares Gold Trust low-cost ETF (ticker: BAR) at a mere 0.17 percent annual fee. As an exchange-traded fund company, GraniteShares’ minimums are just $25 for any investor (read Mom-and-Pop). The firm has grown exponentially to $540 million in assets in under two years.

“GraniteShares came out with a 0.25 percent fee for a commodities fund," in a space that had not seen a super low-cost offering, said Balchunas. “This adds to the fee war” in funds that started with Vanguard leading the charge.

GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (ticker: COMB) is one of the lowest-cost commodity ETFs.

Commodities have not fared well in the latest bull market, losing 39.72 percent for the five-year period ending March 2019. But institutions view commodities as a diversifier and also as a short-term inflation hedge, Balchunas said.

“While no one was looking, the commodity space got Vanguarded – but by GraniteShares," he said.

Wall Street has witnessed a buildup in commodity-linked mutual funds and exchange-traded funds in recent years, in part because of the huge run in equities.

When stock markets turn down, investors tend to flock to gold and other hiding places, and “putting out a commodities fund now is like building a boat before the rain comes," Balchunas said.

GraniteShares was founded by Will Rhind, who previously ran the popular SPDR Gold Shares (ticker: GLD) mutual fund.

Why is Vanguard putting out a commodities fund, when the firm just last year put out a research paper on it, entitled “Compelling in concept, challenging in practice"?

“It’s certainly interesting, when all this time they’ve been a naysayer, and telling people to invest in regular index stock and bond funds,” Rhind said. "So it’s surprising. On the other hand, it’s great news for us, because it’s an endorsement or validation of need to have commodities in a portfolio.

The Vanguard Commodity Strategy Fund will be actively-managed, not just an index fund, and is expected to launch in June. In a press release, Vanguard said the fund will offer investors added portfolio diversification, along with a potential hedge against inflation risk by investing primarily in commodities and treasury inflation protected securities (TIPS).

“We believe the commodity exposure can serve as an effective inflation hedge and also provide value in mitigating stock and bond risks,” said Matt Brancato, head of Vanguard’s Portfolio Review Department, in the release.

Vanguard Commodity Strategy Fund will seek to outperform the Bloomberg Commodity Total Return Index by investing in commodity-linked derivative investments, such as commodity futures and swaps, secured by a mix of Treasury bills (T-bills) and short-term TIPS, which add an additional layer of inflation protection.

Vanguard’s Quantitative Equity and Fixed Income Groups will serve as the fund’s advisors, and have managed Vanguard Managed Payout Fund’s commodity strategy for more than 10 years. At the new fund’s launch, the $1.8 billion Vanguard Managed Payout Fund will reallocate its commodities exposure, consisting of $135 million, to the new fund.

Still, take a closer read of Vanguard’s paper last year: John Ameriks, global head of Vanguard Quantitative Equity Group and a member of the policy-setting Strategic Asset Allocation Committee, said he was “hesitant to call commodities an inflation hedge. Commodities show a very high correlation with unexpected inflation,” Ameriks said. “But over longer horizons, the relationship between the asset class and the broad rate of inflation is not so clear. You have to be careful in your analysis.”

Instead, “commodities are better described as inflation-sensitive, rather than as reliable long-term inflation hedges” and “represent a potential source of portfolio diversification..”