Commodities are outperforming amid the recent chaos, and the asset class may be a critical component of a well-balanced exchange traded fund investment portfolio, both in turbulent times and as a strategic, long-term allocation.
In the recent webcast, How Global Tension Has Fueled Inflation and Commodities, Robert Minter, Director of ETF Investment Strategy, abrdn; and Steven Dunn, Head of Exchange Traded Funds, abrdn, explained that as geopolitical tensions have intensified, so too has the focus on commodities. While the humanitarian impact is, of course, the most important, there are also significant economic impacts to already-heightened energy costs, inflation, and supply chain disruptions.
While the Russia-Ukraine war has been one reason for the recent price spike in commodities, other contributing factors are also at play. Falling supply and rebounding post-coronavirus demand has been a global theme.
For instance, the abrdn analysts highlighted falling supplies in base metals, like copper. While prices have been pushing higher, capital expenditure on new mining projects have not been as quick to respond, especially after many have been burned the last time they executed large spending plans to rapidly expand operations.
This is also mirrored in the energy sector where rig counts remain low and oil producers are loath to make a knee-jerk reaction to surging crude prices. At the most recent count, about 533 oil rigs were pumping out crude, compared to the highs of above 1,400 back in 2014.
According to the latest Dallas Federal Reserve energy survey, officials highlighted a number of factors contributing to the elevated energy prices and slow response from producers to pump out more oil. Specifically, the energy survey highlighted a lack of people to work, along with rising costs of deliveries, piping, fracking sand, and other costs. Meanwhile, the Biden administration has hindered the expansion of fossil fuel infrastructures, namely the Keystone pipeline, among others. Higher regulation and the greater focus on climate change or ESG issues have been a major concern among energy companies.
In the soft commodities or agriculture space, the weather has impeded growth and supply. The so-called La Nina weather phenomenon has contributed to varying weather-related crop damages.
Finally, geopolitical risk or the fallout from the Russia-Ukraine war has also been the most recent negative contributing factor to global commodity supplies. For instance, in 2019, the European Union imports 26.9% of its crude oil needs from Russia, 41.1% of natural gas needs, and 46.7% of solid fuel needs. Russia is also a large producer of other commodities like gold, base metals, and more, with a total of $330 billion in commodities exports back in 2020.
Looking ahead, the abrdn analysts argued that investors should still keep an eye on commodities as an alternative asset to diversify a traditional stock and bond portfolio as long-term trends may still remain. Historically, the inflation and deflation cycles have averaged 18 years.
Commodities have offered improved diversification benefits with low correlations to traditional stock and bond holdings. For example, the Bloomberg Commodity Index has exhibited a 20-year annualized volatility of 16.16%, compared to the 19.57% for the S&P 500 Index.
Investors interested in diversifying their portfolios with broader commodities exposure now have several ETF options available to them. abrdn (formerly Aberdeen Standard Investments) offers a line of ETFs to outperform the widely observed Bloomberg Commodity Indices, all without worrying about troublesome K-1 forms come tax season. These funds include the actively managed abrdn Bloomberg All Commodity Strategy K-1 Free ETF (NYSEArca: BCI) and the abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (NYSEArca: BCD).BCI tries to provide long-term capital appreciation that exceeds the performance of the Bloomberg Commodities Index.
It may not invest in all the benchmark components, but it will hold similar interests to those included in the index, along with short-term investment-grade fixed income securities, money market instruments, specific bank instruments, and cash or other cash alternatives. The underlying Bloomberg Commodities Index tracks the price of rolling positions in a basket of commodity futures with a maturity between one and three months.
BCD tries to provide long-term capital appreciation that exceeds the performance of the Bloomberg All Commodity Index 3 Month Forward Index, which tracks movements in the price of rolling positions in a basket of commodity futures with a longer maturity of between four and six months.
Investors who want to access precious metals may also consider several physically-backed metals-related ETFs as a way to diversify a traditional portfolio mix, including the abrdn Physical Gold Shares ETF (SGOL), the abrdn Physical Silver Shares ETF (SIVR), the abrdn Physical Platinum Shares ETF (NYSEArca: PPLT), and the abrdn Physical Palladium Shares ETF (NYSEArca: PALL). Additionally, the abrdn Physical Precious Metals Basket Shares (NYSEArca: GLTR) acts as a metals catch-all, boasting a mix of gold, silver, platinum, and palladium.
Financial advisors who are interested in learning more about commodity investments can register for the Thursday, April 21 webcast here.