Stocks and bonds are staples of many investment portfolios, but that leaves investors open to potential risks, especially in an extended bull market. On the other hand, one may consider commodity exchange traded funds to navigate the changing environment ahead and help diversify a traditional portfolio.
On the recent webcast, What’s Next for Broad Commodities? Key Themes and Portfolio Solutions, Maxwell Gold, Director of Investment Strategy at ETF Securities, pointed out that as the global economy continues to push forward, inflationary pressures will also rise.
Consequently, investors should consider assets like commodities to help maintain the purchasing power of their investment portfolios. For instance, over the past 26 years when the U.S. Consumer Price Index rose by 0.5%, energy has been among the best performing assets, returning over 25%, while the broader commodities market returned over 15%.
Investors should also consider alternative assets like commodities as the equities bull market enters its ninth year, with high valuations and low yields creating an unattractive landscape that is exposed to greater short-term risks. Over the past 26 years, commodities have displayed low correlations to other asset classes such as equities and fixed-income, Gold said.
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For instance, the broad commodities market exhibited a correlation of about 0.3 to the S&P 500, a 0.4 correlation to the MSCI World Index and a correlation of close to zero to the benchmark Barclays US Aggregate Index – a 1 reading indicates perfect correlation while a 0 reading signals no correlation. Given these low correlations to traditional equity and fixed-income assets, the commodities space may provide a cushion if stocks and bonds suddenly pullback.
Gold also argued that many fundamental factors will support commodities in the environment ahead. For instance, further inventory drawdowns expected in the second half of 2017 will help rebalance the oil market and bolster crude oil prices. Precious metals will benefit from a lower-for-longer interest rate environment and range-bound U.S. dollar. Additionally, rising demand for global infrastructure and industrial growth will add to base metal consumption.
Investors interested in the commodities space have a number of options available to them, including the recently launched line of ETFs that seek to outperform the widely observed Bloomberg Commodity Indices without the need to worry about troublesome K-1 forms come tax season, including the actively managed ETFS Bloomberg All Commodity Strategy K-1 Free ETF (NYSEArca: BCI), ETFS Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (NYSEArca: BCD) and ETFS Bloomberg Energy Commodity Longer Dated Strategy K-1 Free ETF (NYSEArca: BEF).
Eric Balchunas, ETF Analyst with Bloomberg Intelligence, pointed out that many popular futures-based commodity ETFs come with onerous taxation issues, notably troublesome K-1 forms come tax season. However, ETF Securities’ three active funds gain exposure to commodity futures contracts through a wholly-owned subsidiary of the fund, which invests directly in commodity-linked instruments. By indirectly gaining exposure to the commodities market through investing in the wholly-owned subsidiary, the suite of active commodity ETFs may avoid K-1 forms.
Balchunas also noted that these relatively new commodity ETFs are among the cheapest within their asset category – BCI and BCD come with a 0.29% expense ratio, and BEF has a 0.39% expense ratio.
Financial advisors who are interested in learning more about commodities can watch the webcast here on demand.