I have an in-house Schwab and an outside advisor, but from time to time I like to make side bets on my own. Some I have done well with, some I have not. I know this is not F 16, but I am of the mentality that government spending will keep inflation around a good while, and the lack of investment in oil and gas recently will keep oil and other commodity prices elevated in the near future.

That being said, what do investors here think about these two choices for the next market purchase I make. Nothing against their advice, but my Schwab portfolio manager and obviously the outside manager tend to steer me in their directions whenever I ask them about other investments. Gracias

What is the purpose of this "side bet"? I'm not following because the assets you mention are totally different from one another and generally fill completely different functions in a portfolio.

Currently I Bonds are designed merely to ensure that the purchasing power of the invested sum is not lost due to inflation. You'll end up with more money in 5 years due to nominal returns, but you will have no real return by design.

It's great that you have conviction that hydrocarbons will play a continued significant role in the production of energy worldwide and that constrained production in the face of steady/increased demand will keep crude/NG prices elevated. That conviction would justify an investment in an ETF like DRLL, but I must point out that this is an equity investment designed to provide real returns (unlike I Bonds) with the trade-off that there is significantly increased volatility and the possibility of real losses due to valuation and performance of the underlying equities.

Additionally, while I respect Vivek Ramaswamy and what he is trying to do to pressure passive money managers to restrain themselves from injecting their own views into corporate governance, I think sector ETFs don't provide a significant service (in most cases) because one could construct a mini-ETF on his or her own. Just take $10,000 and invest it into the equities that make up DRLL in the appropriate percentages and you'll end up with a more or less equivalent ETF with no management fees and the ability to vote all your shares in accordance with your own values and what you think best.

https://www.bloomberg.com/quote/DRLL:US

As to whether and O&G equity ETF or I Bonds are more appropriate for you... That requires significantly more information about your personal circumstances and goals.

Thanks for the response. I am extremely equity heavy, by design. All I really care about is growth, liquidity isn't important. Over a year ago, I told both my internal and external advisors that I wanted to get much more heavily invested in commodities, and they both pretty much answered that I probably had enough commodity exposure in the mutual funds they had me invested in. My biggest positions (outside of my qualified account through work) are in Winslow, Zacks, Schwab Intelligence (equity heavy), and Scharf Investments (outside advisor). I have very little bond exposure, and wouldn't mind a bit of an inflation hedge with the I bonds. And the DRLL would satisfy my interest in going commodity heavier. In all honesty, I don't mind spending a bit of extra money to make a statement about ESG investing, either. Not going to bet the proverbial farm, but...

Edit to add: there IS a thread including DRLL in F 16 (for the record, I have no problem with that place, it's just there for different information than what I am interested in getting).

https://texags.com/forums/16/topics/3308000

And, here is what my advisor said about DRLL specifically:


Hey Kool (not actually his words),
I think DRLL is an interesting investment and I can see why you would be interested in getting some exposure to it. From an investment standpoint, we believe that it will likely be an uphill battle for Ramaswamy to undo most of what the ESG funds and other large institutional have done to the energy industry. And as I may have pointed out before we do not like the energy sector for a couple of reasons: they are price takers OPEC+ has control; cyclicality prefer businesses that have much less earnings volatility. There are also cheaper and less risky ways to add energy exposure like buying stock in an individual company or just buying XLE. I would also point out that the fund is very thinly traded and therefore has higher liquidity risk in the event of capital outflows. It is also a new fund without a track record so viability is unknown.

We have seen this story before with energy. Same thing happened in energy leading up to the GFC in 07-08 and we all know what happened after that. They are projecting a high degree of multiple expansion. Prices have been bid up quite a bit since a major decline at the start of COVID and earnings could have some room to run we just don't see that kind of sustainable upside in this sector or a reason for that kind of multiple expansion.

Please let me know if you have any additional questions.

Thanks,

Your Trusty Financial Advisor (not actually his closing salutation)

If all you care about is "growth", you have no business in I Bonds. As noted, I Bonds (with a fixed rate of 0) are not designed to have an "real" growth--only to match inflation and preserve purchasing power.

Also as noted, I think DRLL is a fine ETF. I'm somewhat sympathetic to its stated purpose, but as Vivek would no doubt agree, investing is fundamentally about money--not virtue signalling. If it's fundamentally about money, why would I pay someone X basis points to construct a sector ETF when I could buy XOM, CVX, COP, EOG, PSX, SLB, HAL etc. in varying proportions and end up with the same thing (equity wise) and the ability to vote my shares as I see fit (as i will surely disagree with Vivek on some future matters of corporate governance just as I currently disagree with Larry Fink).

Well, that is why I ask here. Thanks for your reply. The only advantage I could see in buying DRLL over a basket of companies on my own would be I would assume they would be watching the investment and buying and selling within it in order to earn their 0.41% management fee. I really don't like watching individual stocks. I have a full time job and I know what I am good at and, at least as importantly, what I am NOT good at. Thanks again.

Everything your financial advisor wrote is correct/reasonable/defensible. I would point out that your advisor said the same thing that I said with regard to DRLL--what's the point of buying the ETF for O&G exposure when you could buy the individual equities in this sector?

I would disagree with your advisor that the returns in the O&G equities sector come from cyclicality and multiple expansion. While there certainly is cyclicality and the volatility that comes with it, I think over the long term returns will come from return of shareholder capital across a sector that is perpetually undervalued because the market dislikes it (much like tobacco over the past 25 years).

The question for O&G returns these past 5 years was, "will hydrocarbons exist as a major energy source for a long enough period of time that I'll get my returns by staying invested and receiving the return of capital to shareholders?" I believe that will be the case, and my view has been buttressed (IMO) in these past 6 months by Warren Buffet/Berkshire Hathaway. Warren (who has excellent insight into power generation through Berkshire Hathaway Energy) spoke extensively about the persistence of O&G as an energy source at the shareholders meeting this year and backed up his words by buying gobs of CVX and OXY. I'd also posit (and this is pure speculation) that Uncle Warren has become familiar with OXY's direct carbon capture technologies since becoming a significant OXY shareholder and believes that direct carbon capture technology will extend the lifespan of hydrocarbons as a significant worldwide energy source.

I constructed my own mini O&G ETF during the pandemic consisting of CVX (25%), XOM (25%), COP (20%), SHEL (10%), BP (10%), and TTE (10%) now with extra exposure to CVX and OXY through my large BRK position, and Warren's actions have steeled my resolve not to sell during this upswing, but to hold indefinitely and harvest the return of shareholder capital (I reinvest dividends from these equities into sectors other than O&G).

billikenag said:

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If all you care about is "growth", you have no business in I Bonds. As noted, I Bonds (with a fixed rate of 0) are not designed to have an "real" growth--only to match inflation and preserve purchasing power.

Also as noted, I think DRLL is a fine ETF. I'm somewhat sympathetic to its stated purpose, but as Vivek would no doubt agree, investing is fundamentally about money--not virtue signalling. If it's fundamentally about money, why would I pay someone X basis points to construct a sector ETF when I could buy XOM, CVX, COP, EOG, PSX, SLB, HAL etc. in varying proportions and end up with the same thing (equity wise) and the ability to vote my shares as I see fit (as i will surely disagree with Vivek on some future matters of corporate governance just as I currently disagree with Larry Fink).

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I Bonds: I will just point out that the rate of return on i bonds has been higher than reported inflation for a while now. Real inflation is probably equal to what they are paying out which I believe is moving to ~12% with their next change.

However, the manipulated, reported inflation numbers don't actually equal the paid out rates on their very own inflation hedging vehicle.

I find that to be humorous and ironic.

The variable rate of I-Bonds is backward-looking based on the percent change in the CPI-U.

Example: The CPI-U in Sept '21 was 274.3. The CPI-U in Mar '22 was 287.5. The percent change is 4.81. Double that 6 month percent change to get an annual rate of 9.62%--the current variable rate of I-bonds (set on May 1).

The July CPI-U was 296.3. This yields a percent change of 3.1. We still have August and September's CPI-U releases to go, but with the CPI-U increases decreasing in velocity, I have a hard time believing the 6 month percent change in the CPI-U tops 4.5%. That means the 6 month variable rate for I-bonds will likely be under 9%.