Total Commodity ETN: Low Correlation, High Sleep Factor
The first reaction that many may have to commodity investing is "very risky." The reaction is rational if one confines his/her thinking to oil or certain metals.
Yet the Dow Jones-AIG Commodity Index is one that happens to have a total return approach; specifically, it is diversified across the entire realm from industrial metals to precious metals, livestock to agricultural products, oil to natural gas. And no one area can account for more than 33% in the overall sector weightings.
If you like the idea of diversifying, then, you're going to get it twice here; that is, you'll be diversified across an all-encompassing commodities basket and you'll be diversified across asset classes in your portfolio (i.e., stocks, bonds, currencies, commodities, etc.).
The iShares Dow Jones-AIG Commodity Index ETN (DJP) is uniquely "disconnected" from the broader U.S. stock and bond markets. The correlation between DJP and the S&P 500 SPDR (SPY) or the Lehman Aggregate Bond Index (AGG) is virtually non-existent at .09% and 02% respectively. In other words, no matter what's happening in stocks and bonds, the iShares Dow Jones-AIG Commodity Index ETN (DJP) will move independently.
Interestingly enough, however, there's a higher correlation of 0.23% to the pan-European/Pacific MSCI EAFE Index (EFA). The correlation is still rather small. Nevertheless, one might be inclined to believe that, as global economic growth across the globe has flourished, so has demand for metals, energy and food products.
I've discussed the iShares Dow Jones-AIG Commodity Index ETN (DJP) at length in several previous columns. Specifically, DJP served as a terrific buffer in the painful July/August selloff. Moreover, DJP can play a critical role in a well-balanced, well-diversified portfolio.
Right now, we may be witnessing something else that favors a small allocation: New Highs. Back on June 15, DJP closed at a high of 52.72. It pushed that envelope here on September 17... all day long.
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