Commodities are all the rage lately.  How are they doing?  Generally, they are ahead for the year-to-date period. The energy commodity funds are leading the pack. The broad based commodity funds GSG, DJP and DBC, which we reviewed in some detail in a prior article, show middling performance.  The other narrow scope commodity funds are generally doing less well than the broad based funds. On a three-month basis, the narrow scope funds are generally in negative territory. Many of the funds currently have too few assets under management and too little trading volume to warrant investment.

It is ironic that US REITs year-to-date have outperformed US stocks, non-US developed market stocks, and emerging market stocks, as well as directly owned commercial and residential real estate. Only commodities have outperformed REITs so far this year.

VNQ, ICF, IYR and RWR are still down from 17% to 20% on a trailing 12-month basis, but they provide a 12-month distribution yield of from 3.90% to 4.75% which is more than the current 10-year T-Bond rate of about 3.70%.

How vulnerable REITs are to a reversal of fortune is unclear.  If the economy is as vulnerable to major recession as some say, the rental income of REITs may not prove as strong as expected, which would tend to lower the distribution yield.  Continued outperformance itself, would reduce the yield rate.  Rising interest rates due to inflation* could reverse the yield spread between REITs and T-Bonds, which would take steam from the REITs.

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Stocks in the US are often classified by market capitalization or by style (growth, value or blend). Those differences are not sufficient to create different asset classes, but within the US stocks asset class they have produced different results.

The categories are similar in character and their correlation with the broad US market is high (from the low 80’s to the high 90’s). For those reasons, they just don’t work well as separate asset classes. That said, they may present some element of opportunity for sub-class rebalancing gains due to return rotation within an allocated portfolio.

The chart shows the return for the index of each category for each of 11 calendar years, including 1997-2007. The top half of the chart color codes each year for each index category based on the level of return. The bottom half of the chart color codes each year according to

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Banks have had a rough time lately and the market performance of their stocks reflect that. Now that Secretary Paulson and some others are calling a bottom for the financial crisis, it is timely to look at the Keefe Bruyette & Woods Large Bank Index and the ETF that tracks it (KBE).

Technicals:

The five-year chart shows the KBW index (BKX in black) versus the S&P 500 (proxy SPY in gold). The BKX 200-day average is shown in blue and the 50-day average is shown in violet.

The YTD chart shows the KBW large bank ETF (proxy KBE in blue) versus the S&P 500 (proxy SPY in red).

The KBE candlestick chart provides alternative detail of the YTD performance of KBE alone, along with its 200-day and 50-day day moving averages.

KBE has massively underperformed the S&P 500. As of May

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