What is COM? (Pros, Cons, and Strategies)

Diversification is key in any investment strategy, and commodities can be a valuable addition to a diversified portfolio. The Direxion Auspice Broad Commodity Strategy ETF, or COM, offers investors exposure to a mix of commodities in a single ETF. Whether you're looking for a hedge against inflation or a way to diversify beyond traditional equities and bonds, COM could be a viable option. Let's dive deeper into what COM is, its advantages and disadvantages, and how to strategically incorporate it into your investment portfolio.

What is COM?

COM stands for Direxion Auspice Broad Commodity Strategy ETF. It aims to provide investors with exposure to a broad range of commodity markets. COM follows the Auspice Broad Commodity Index (ABCERI), which includes a diverse set of commodities often divided into categories like energy, metals, and agriculture.

Key Features of COM

• Broad Exposure: Includes a diversified list of commodities—ranging from oil and natural gas to gold and soybeans.
• Active Management: Utilizes rule-based strategies to select commodities and manage risk.
• Inflation Hedge: Commodities often perform well during inflationary periods, offering a potential hedge against rising prices.

By investing in COM, you're gaining access to a carefully selected basket of commodities, with the goal of benefiting from price movements in these vital resources.

COM Composition

COM invests in a variety of commodities, including but not limited to:

• Energy: Crude oil, natural gas
• Metals: Gold, silver, copper
• Agriculture: Wheat, corn, soybeans

The ETF uses a unique strategy that selects commodities based on momentum and risk criteria, aiming to reduce volatility and enhance returns over time.

Pros of COM

Diversification

One of the standout benefits of COM is its diversification. By investing in a range of commodities, you aren't overly exposed to the fluctuations of any single commodity market. This diversification can help to smooth out returns and reduce portfolio risk.

Inflation Hedge

Commodities have historically performed well during periods of inflation. By including COM in your portfolio, you add an asset that can help preserve purchasing power when prices for goods and services rise. This makes COM particularly appealing in an inflationary environment.

Active Risk Management

COM employs a rule-based strategy to select the most promising commodities while managing risk. The goal is to enhance returns while minimizing volatility, offering a more stable investment compared to individual commodity investments.

Low Correlation with Equities and Bonds

Commodities typically have a low correlation with equities and bonds. By including commodities in your portfolio, you can improve diversification and potentially reduce overall portfolio volatility. COM provides an easy way to gain this exposure.

Cons of COM

Volatile Nature

Despite its risk management strategies, the commodity market is inherently volatile. Prices can swing dramatically based on geopolitical events, natural disasters, and changes in supply and demand. Investors should be prepared for this inherent volatility.

Expense Ratio

As an actively managed ETF, COM has a higher expense ratio compared to some passive commodity ETFs. While the active management aims to provide better risk-adjusted returns, the higher costs could eat into profits, especially in a low-return environment.

Potential for Negative Roll Yield

Commodities futures markets often encounter a phenomenon known as "negative roll yield." This occurs when the price of futures contracts decreases as they near expiration, requiring the purchase of more expensive, longer-term contracts. This can erode returns over time.

COM Investment Strategies

COM can be a valuable tool for investors looking to hedge against inflation, diversify their portfolios, or take advantage of commodity price movements. Here are some strategies for incorporating COM into your investment approach.

Long-term Investment Strategy

For long-term investors, COM can be a good addition to a diversified portfolio. Its broad exposure to commodities provides a hedge against inflation and improves overall diversification.

Strategic Allocation

Rather than investing a large portion of your portfolio in commodities, consider allocating a smaller percentage, such as 5-10%, to COM. This allows you to gain the benefits of commodity exposure without taking on excessive risk.

Cyclical Investment

Commodities tend to perform well in certain economic environments, particularly during periods of inflation or economic growth. By tactically increasing your exposure to COM during these periods, you can maximize returns.

Rebalancing

Regularly rebalance your portfolio to maintain your desired allocation to COM. This helps to manage risk and ensures that your portfolio remains aligned with your investment goals.

Conclusion

COM offers investors a way to gain broad exposure to the commodity markets, providing diversification, a potential inflation hedge, and a low correlation with traditional asset classes. While it comes with its own set of risks, including inherent volatility and a higher expense ratio, the advantages can outweigh these drawbacks when strategically incorporated into a well-diversified portfolio. Whether you're a long-term investor looking to bolster your portfolio or someone seeking to hedge against inflation, COM could be a valuable addition to your investment toolkit.