Commodities Funds: Handle With Care

Alina Lamy: In this week's chart, we are going to take a look at the money that flowed in and out of various categories of commodities funds over the past six months.

Oil prices have continued to decline, from $49.20 a barrel last August to $33.66 at the end of January--that's a 32% decline. Normally, when an asset class experiences that kind of a drop in value, we would expect to see drastic outflows. Interestingly, however, flows into energy funds have been mostly positive over this time period. Seeing how prices have reached such an extreme low, these positive flows suggest that some investors are betting on a possible reversal sometime soon and are trying to time the bottom. That's a speculative and very risky strategy.

Gold, on the other hand, hasn't appreciated much, but there is more to that than simply investors chasing returns. Gold is seen as a hedge, a way to try to preserve wealth against the risk of loss in other asset classes. With a less-than-stellar stock market--the S&P 500 losing 5% in January and 8.5% year to date through mid-February--investors turned to gold, which is perceived as a "safe" asset in times of market stress. Precious-metals commodities funds received their first sizable inflow since January 2015. The SPDR Gold Shares ETF (GLD) was the most popular fund, attracting $1.4 billion.

There are many benefits that commodities funds can bring to a portfolio--diversification, first and foremost)--but investors should also keep in mind that these are very volatile investments and should control their allocations accordingly.