Commodities and related exchange traded funds have underperformed equities and fixed-income markets over the past few years, but investors should not ignore the benefits of including some exposure to diversify their portfolios.
The broad commodities market has been falling behind. Year-to-date, the GreenHaven Continuous Commodity Index Fund (NYSEArca: GCC) dipped 4.8%, PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) fell 4.3%, iPath Dow Jones-UBS Commodity Index Total Return ETN (NYSEArca: DJP) declined 4.4% and iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG) was down 2.6%.
Nevertheless, Gary Gorton and K Geert Rouwenhorst, both of Yale School of Management, argue that investors should not overlook commodities investments, Financial Times reports.
Specifically, the academics’ research found that a commodities futures index provided similar returns to equities but moved out of step with equities and fixed-income assets. The lower correlation to traditional assets is an attractive diversification quality. Additionally, the researchers found that commodities protected against inflation better than stocks and bonds.
Over the past decade, the benefits of holding commodities exposure have not changed, Professors Gorton and Rouwenhorst contend.
“I think you should always have exposure to commodity futures if you’re a large investor,” Prof. Gorton said.
More recently, many market observers argued that the greater interest in commodities among institutional and speculative traders have fueled volatility. Nevertheless, in their latest paper, Facts and Fantasies about Commodity Futures Ten Years Later, Profs Gorton and Rouwenhorst argue that the impact of financialization was marginal and that their previous recommendation for institutions to hold commodities still holds true.
Currently, commodities continue to show low correlation to stocks and bonds, so fundamentals driven by supply and demand will contribute to commodity swings.
For instance, the recent uptick in soft commodities prices may be attributed to El Nino forecasts. Mark Smulders, a senior economist and Food & Agriculture Organization representative, said the moderate-to-severe weather pattern will likely hurt world grain production, Bloomberg reports. Specifically, Smulders projected a 1.4% decline in Wheat output for 2015-2016.
“There might be quite an impact on production and it may last until the end of the year,” Smulders said.
Consequently, many soft commodities and grains-related exchange traded products have been rebounding. For instance, over the past week, the PowerShares DB Agriculture Fund (NYSEArca: DBA) rose 1.7% and iPath Dow Jones UBS Agriculture Sub-Index ETN (NYSEArca: JJA) jumped 3.5%. Additionally, the Teucrium Corn Fund (NYSEArca: CORN) was 2.4% higher, Teucrium Soybean Fund (NYSEArca: SOYB) was up 0.7% and Teucrium Wheat Fund (NYSEArca: WEAT) advanced 3.6%. [Soft Commodity ETFs Could Rebound on El Niño Weather]
For more information on the commodities space, visit our commodity ETFs category.
Max Chen contributed to this article.