# ETF Portfolio Optimization - Adding Commodities



## Dan_the_Man (Apr 6, 2009)

On many of the financial blog sites, folks have actively discussed allocation percentages across Canadian, US, EMEA, BRIC and bond/income markets. I have not seen anyone propose adding commodities as a way of further diversification in that these types of investments generally act counter-cyclical to the stock market. I am thinking of adjusting 5% of my portfolio to this asset class (precious metals perhaps). Does anyone have strong views for or against this move?

As a follow-on, if I did go with a material or metals based commodity - perhaps as a hedge against inflation concerns, would this make an additional investment in Real Return Bonds (say XRB) redundant?

Thanks everyone - I am a first time poster (anywhere), so please forgive any etiquette errors!


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## CanadianCapitalist (Mar 31, 2009)

Dan_the_Man said:


> I am thinking of adjusting 5% of my portfolio to this asset class (precious metals perhaps). Does anyone have strong views for or against this move?
> 
> As a follow-on, if I did go with a material or metals based commodity - perhaps as a hedge against inflation concerns, would this make an additional investment in Real Return Bonds (say XRB) redundant?


William Bernstein, the author of _The Four Pillars of Investing_, is of the opinion that a small allocation to gold equities, say 2% provides valuable diversification benefits. His argument is that the allocation is small enough not to hurt returns when gold equities have poor years but in good years, gold equities tend to go up a lot especially when other asset classes are having poor returns. 

Bernstein's recommendation is for US investors and I wonder if it is applicable for Canadian investors as the TSX has a healthy exposure to gold and other commodity equities. 

I would not replace real return bonds with commodity stocks because although there is a high correlation between commodities and inflation, it is not perfect. Real return bonds, on the other hand, provide a close to perfect hedge against inflation.


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