Vanguard has launched the Vanguard Commodity Strategy Fund (VCMDX) for investors seeking low-cost exposure to the commodities market.
The fund will be offered in Admiral Shares, with an estimated expense ratio of 0.20per cent, which is one-sixth the 1.24per cent average expense ratio of competing broad-based commodity-linked funds.
Vanguard Commodity Strategy Fund employs an actively managed approach and seeks to offer diversification to a traditional stock/bond portfolio and a hedge against inflation by investing in a mix of Treasury bills (T-bills) and short-term treasury inflation-protected securities (TIPS). The fund’s objective is to seek to provide broad commodities exposure and capital appreciation.
Inflation fluctuations are difficult to predict and can have significant impact on both stock and bond market returns. Vanguard believes that a diversified blend of commodity-linked futures and short-term TIPS can provide diversification benefits in the event of unexpected inflation, as commodities returns have historically exhibited low correlation to those of the equity and fixed income markets.
Additionally, Vanguard’s latest research on combating inflation found that commodities can offer a higher level of inflation protection beyond the invested position, making it an attractive option for sophisticated investors willing to accept the risks associated with investing in this particular asset class. The fund’s advisor will pursue additional inflation protection by collateralising a portion of the portfolio in short-term TIPS and will take advantage of liquidity premiums by holding longer futures contracts.
Vanguard serves as the fund’s advisor, with oversight by two internal management groups that bring years of expertise in managing both alternative strategies and TIPS investments. For more than 10 years, Vanguard’s Quantitative Equity Group has managed the commodities allocation for Vanguard Managed Payout Fund and oversees more than USD2 billion in alternative strategies in aggregate.2 Vanguard Managed Payout Fund’s commodities exposure – currently USD125.8 million – will be reallocated to the new fund. Vanguard’s Fixed Income Group manages USD1.5 trillion in assets, including several TIPS and T-bill portfolios, including the USD29.1 billion Vanguard Short-Term Inflation-Protected Securities Index Fund.
