Commodity prices and related exchange traded funds could catch a tailwind from a weakening U.S. dollar.
Commodities have been weighed down by an appreciating U.S. dollar, but now, some banks are projecting a weaker outlook for the greenback in the year ahead on expectations that the Federal Reserve will maintain its low interest rate levels, the Wall Street Journal reports. The weaker dollar makes USD-denominated commodities less expensive for overseas buyers.
“When there’s weakness in the dollar, the usual response is to pick up things that are priced in dollars,” Tai Wong, head of base and precious metals derivatives trading at Bank of Montreal, told the WSJ.
Over the past three months, commodity prices increased as the WSJ Dollar Index pulled back by 1.9% from its 2019 high in September.
Dissipating trade tensions between the U.S. and China have also helped weaken the greenback and supported the commodities outlook in recent weeks. The world’s two largest economies have signed a limited trade agreement and are working on plans for another deal in the future.
ETF investors who are interested in gaining exposure to the improving commodities markets have a number a ways to access the various markets. For example, the Invesco DB Optimum Yield Diversified Commodity Strategy Portfolio (NasdaqGM: PDBC), iShares S&P GSCI Commodity-Indexed Trust (NYSEARCA: GSG) and United States Commodity Index Fund (NYSEArca: USCI) provide broad commodities market exposure.
PDBC is an actively managed ETF that provides long-term capital appreciation using an investment strategy designed to exceed the performance of DBIQ Optimum Yield Diversified Commodity Index Excess Return, an index composed of futures contracts on 14 heavily traded commodities across the energy, precious metals, industrial metals and agriculture sectors.
GSG tracks the widely observed S&P GSCI Total Return Index, which includes a broad range of commodities exposure across energy, industrial and precious metals, agricultural, and livestock markets.
The United States Commodity Index Fund tries to reflect the performance of the SummerHaven Dynamic Commodity Index Total Return, which includes 14 commodities futures that are equally weighted and represent six sectors: Energy (WTI crude oil, Brent crude oil, natural gas, heating oil, gasoil, RBOB gasoline), Precious Metals (gold, silver, platinum), Industrial Metals (aluminum, copper, lead, nickel, tin, zinc), Grains (corn, soybeans, soybean meal, soybean oil, wheat), Livestock (live cattle, feeder cattle, lean hogs) and Softs (coffee, cocoa, cotton and sugar).
For more information on the commodities market, visit our commodity ETFs category.