FTGC: Active Commodity Exposure That Works (NASDAQ:FTGC)

Commodities are on the comeback recently, and I think momentum can continue. It’s not just Gold. There’s a broader movement taking place which investors can take advantage of. The reason? Concerns around inflation, of course. Investing in commodities can provide a hedge against inflation, as their prices often increase when the purchasing power of fiat currencies declines. Moreover, commodities can offer diversification benefits to an investment portfolio, as their prices frequently exhibit a low correlation with the performance of traditional asset classes like stocks and bonds.

If you’re looking for commodities exposure that is actively managed because you want more of an inflation hedge in your portfolio, then First Trust Global Tactical Commodity Strategy Fund ETF (NASDAQ:FTGC) might be the fund for you. FTGC is an actively managed ETF that provides investors with exposure to an extensive basket of commodities. Launched by First Trust Advisors L.P. on October 22, 2013, FTGC adopts a systematic, quantitative, and mathematical approach to commodity investing. This approach emphasizes achieving robust diversification and a targeted range of volatility. The fund currently manages about $2.3 billion and charged an expense ratio of 0.95%.

FTGC’s unique strategy aims to maximize returns through a portfolio that balances its weight among five commodity sub-sectors: energy, agriculture, industrial metals, precious metals, and livestock. Unlike index-based commodity ETFs, FTGC seeks to minimize drawdowns while potentially benefiting from the mean-reverting tendencies often seen in commodity markets.

FTGC’s Holdings: A Closer Look

FTGC’s investment approach leads to a portfolio that is not heavily concentrated in any single commodity. Instead, it offers a relatively balanced exposure to various commodities. Positions include:

1. Gold – Traditionally used as a hedge against inflation and currency depreciation, gold accounted for a significant portion of FTGC’s portfolio.
2. Coffee – An essential agricultural commodity, coffee saw a surge in prices, contributing positively to FTGC’s returns.
3. Cocoa – Another key agricultural commodity, cocoa also registered price growth, boosting the fund’s performance.
4. Copper – Used widely in construction and electrical applications, copper is a crucial industrial metal.
5. Silver – Like gold, silver serves as a store of value and has industrial applications, making it a vital part of FTGC’s holdings.

These holdings demonstrate FTGC’s diversified commodity exposure, offering investors a balance between various commodity sectors.

Sector Composition and Weightings

FTGC’s portfolio composition across different commodity sectors. I like how broad the allocations are overall here.

Peer Comparison: FTGC vs. Other Commodity ETFs

One of the notable competitors to FTGC is the Invesco DB Commodity Index Tracking Fund (DBC). FTGC has outperformed DBC by over 200 basis points given the way its rules-based allocations have allocated in the last several years. Both are broad-based funds and provide good exposure overall to the commodity asset class. FTGC has just done better with its active approach.

Pros and Cons of Investing in FTGC

Advantages

1. Diversification: FTGC provides exposure to a broad range of commodities, offering a hedge against inflation and currency depreciation.
2. Risk Management: The fund’s active management approach targets a specific level of volatility, providing a relatively stable risk profile.
3. Tax Efficiency: FTGC is taxed as an equity ETF due to its investment structure, avoiding the tax complications associated with K-1 forms.

Disadvantages

1. Underperformance: Commodities have underperformed many other assets, so it’s worth considering your own view of where we are in the cycle before considering the fund.
2. Expense Ratio: With an expense ratio of 0.95%, FTGC is pricier than some of its competitors.
3. Lack of Direct Investment: Unlike other investment options, FTGC does not allow investors to directly invest in commodities.

Conclusion: Is FTGC a Good Investment?

Investing in First Trust Global Tactical Commodity Strategy Fund ETF is a good proxy for commodities exposure. This is particularly true if you’re looking for an actively managed fund that has the potential to protect against inflation and currency depreciation, gain exposure to global growth, and diversify overall.

However, for investors seeking rapid capital appreciation, more aggressive or high-beta funds than First Trust Global Tactical Commodity Strategy Fund ETF might be a better fit. Good fund overall at what could be the right point in the cycle.

Markets aren’t as efficient as conventional wisdom would have you believe. Gaps often appear between market signals and investor reactions that help give an indication of whether we are in a “risk-on” or “risk-off” environment.

The Lead-Lag Report can give you an edge in reading the market so you can make asset allocation decisions based on award winning research. I’ll give you the signals–it’s up to you to decide whether to go on offense (i.e., add exposure to risky assets such as stocks when risk is “on”) or play defense (i.e., lean toward more conservative assets such as bonds/cash when risk is “off”).