Admittedly, the linkage appears to have moved apart since September 2015 (largely due to U.S. equities continuing their remarkable post-crisis run, as over this time, the S&P 500 has risen 48%, with its price-to-earnings ratio expanding from 17x to 23x earnings2). Whether this represents a permanent break or a temporary breather from a 15-year trend may soon be determined.
More Than Just Oil
When analyzing potential vehicles in which to invest, we’ve found that some of the largest commodity mutual funds and exchange-traded funds (EFTs) are concentrated in contracts related to energy and oil. While the price of a barrel of oil is undoubtedly important, just as with all other asset classes, we think diversification is key.
Related: Gold Technicals Encouraging, Extend Gains
The WisdomTree Continuous Commodity Index Fund (GCC), which tracks the Thomson Reuters index, equally weights 17 different commodities contracts and rebalances daily. This ensures no individual contract or sector can dominate the underlying exposure of the ETF, and that its return drivers will have more determinants than just the price of oil.
With investors finally reconsidering adding commodities to their portfolios once again, we think a strategy like GCC can be a very useful diversification tool—especially if the inflation that the market is anticipating finally arrives.
This article has been republished with permission from Wisdom Tree.