Broad commodity exchange traded funds have rebounded the past couple of months, but the asset class is still the biggest outflow loser in ETFs this year, reflecting investors’ diminished inflation expectations.
The iPath S&P GSCI Total Return Index ETN (NYSEArca: GSP) has gained 3.9% over the past three months while the iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG) rose 3.2%. [Commodity ETFs Rally Back to Multi-Month Highs]
“A long-term investment in a broad basket of commodities is likely to appeal to investors seeking portfolio diversification,” according to Morningstar analyst Abby Woodham. “Commodities are a strong portfolio diversifier in most market environments because they are only loosely correlated with equities and fixed-income assets. From 1970 to 2004, commodities were negatively correlated with other asset classes like global equities and domestic bonds.”
Looking at total U.S. ETF inflows and outflows year-to-date, commodity ETFs experienced $23 billion in outflows, according to a ConvergEx research note. This suggests that investors expect the low inflationary outlook to hold – inflation is still sitting under the Fed’s annual target of 2%.
Commodity ETFs have seen net outflows of $463 million the past month and $1.7 billion so far in the third quarter, according to ConvergEx
“Commodities tend to be more correlated to inflation than any asset other than cash,” Morningstar’s Woodham added. “As an inflation hedge, commodities usually underperform in periods of low inflation and outperform when inflation is high, allowing investors to maintain their purchasing power.”
The commodity ETFs track a basket of futures contracts. Futures contracts with a longer expiration date have a higher price, compared to the spot price. As a contract moves closer to the expiration date, the futures price needs to converge with the spot price. If longer-dated contracts are more expensive, the futures market is said to be in a state of “contango.” In a contangoed market, the ETF loses money each time it rolls contracts to a costlier later-dated contract. [Backwardation and Contango]
iPath S&P GSCI Total Return Index ETN
For more information on commodities, visit our commodity ETFs.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.