Vanguard has filed a preliminary registration statement with the Securities and Exchange Commission for the Vanguard Commodity Strategy Fund – a new actively-managed fund, which is expected to launch in June 2019.
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).
“The Commodity Strategy Fund will be a low-cost, broad-based option for advisors and institutional investors seeking additional diversification and inflation protection for a well-balanced portfolio,” says Matt Brancato (pictured), head of Vanguard’s Portfolio Review Department. “We believe the commodity exposure can serve as an effective inflation hedge and also provide value in mitigating stock and bond risks.”
Vanguard’s new fund will bring a low-cost entrant to the commodity category, which has an average expense ratio of 1.25 per cent. The fund will solely offer Admiral Shares at a USD50,000 investment minimum, with an estimated expense ratio of 0.20 per cent – less than a sixth of the cost of competing broad-based commodity-linked funds.
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, collateralised 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, bringing their deep experience and expertise to the management of the fund. Vanguard’s Quantitative Equity team, comprising 35 strategists, analysts, and portfolio managers, has managed Vanguard Managed Payout Fund’s commodity strategy for more than 10 years. At launch, the USD1.8 billion Vanguard Managed Payout Fund will reallocate its commodities exposure, consisting of USD135 million, to the new fund, and will ultimately benefit from the added inflation protection.2 Vanguard’s Fixed Income Group, with more than 175 investment professionals, oversees more than USD1.2 trillion in assets, and manages one of the largest TIPS funds, Vanguard Short-Term Inflation-Protected Securities Fund with USD27.8 billion in assets. The two teams oversee portions of the USD316 million Vanguard Alternative Strategies Fund, as well.
Commodity-linked investments can be appealing for investors seeking a hedge against inflation, especially as inflation shocks have been historically volatile and hard to predict. Additionally, commodities can offer diversification benefits to a balanced portfolio, as their returns tend to move independently from those of equities and bonds. However, there can be considerable risks with commodities, including episodic boom-bust cycles, high volatility, and low returns over long periods.