“As financial investors including banks and hedge funds have reduced their activity in commodities markets in the last two years, we’ve seen a marked drop in the correlation between the returns on the equity markets and the returns on oil and other commodities futures markets,” Bicchetti said in the Reuters article.
As the correlation dips between commodities and equities, commodity ETFs may do a better job of diversifying a traditional investment portfolio of equities and fixed-income assets, providing investors with an asset that zigs while stocks zag. [Alternative Asset ETFs Diversify Portfolios]
For instance, the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) gained 3.4%, iPath Dow Jones-UBS Commodity Index Total Return ETN (NYSEArca: DJP) rose 9.7% and iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG) increased 3.8% year-to-date. Meanwhile, the S&P 500 is up 2.1% so far this year.
“From 1970 to 2004, commodities were negatively correlated with other asset classes like global equities and domestic bonds,” according to Morningstar analyst Abby Woodham. “The correlation between commodities and the S&P 500 rose significantly after the financial crisis in 2008 but appears to be declining again today.”
For more information on the commodities market, visit our commodity ETFs category.
Max Chen contributed to this article.