Exchange traded fund investors should consider the role commodities can play in a well-balanced investment portfolio.
In the recent webcast, Commodities: Disrupted Demand, Disrupted Supply, Continued Opportunities, Robert Minter, Director of ETF Investment Strategy, Aberdeen Standard Investments; and Stan Kiang, Director of Strategic Accounts, Aberdeen Standard Investments, argued that while commodities have always rounded out diversified portfolios, they are becoming even more prominent as we begin to emerge from the global COVID-19 pandemic.
The strategists pointed out that the cost of raw materials and goods are rising. For example, looking at the one-year price gain ended May 2021, investors may find that lumber prices increased 261%, gasoline jumped 100%, copper rose 89%, sugar was up 57%, silver returned 53%, and hog prices were 114% higher, among others.
As we look ahead, Aberdeen is monitoring five major themes that will continue to contribute to the commodities market: the Federal Reserve’s monetary policy, the U.S. government’s fiscal policy, de-carbonization and climate policy, capital restrictions, and de-globalization.
For starters, the Fed has engaged in a very loose monetary policy to support the ailing economy that is convalescing from the coronavirus pandemic. The U.S. Federal Reserve has purchased bonds, bought mortgages, and expanded its balance sheet to a tune of $120 billion per month.
The U.S. government has also thrown money at the economy in hopes of supporting the recovery process. Covid-related fiscal response through year end 2020 came in at around $3.4 trillion, and the Biden administration is still looking at even more infrastructure spending. Consequently, U.S. treasury debt outstanding has grown 22% in one year.
De-carbonization is now a global issue and contributes to a shift in economic trends. Europe, China, and the U.S. represent $51 trillion of global GDP and are all de-carbonizing. The Bloomberg Commodity Index returned 220% in the last super-cycle of 1999-2008.
The shifting climate policy has also added on capital restrictions on fossil fuel investment, which have led to the decline in demand for fossil fuel. For example, approximately $14.56 trillion in institutional investing has already been divested from the fossil fuel energy sector. Meanwhile, oil and gas capital investment is down significantly.
Lastly, de-globalization trends have also added to commodities market stress.
Looking beyond the macro view, commodities have also played a critical role as a portfolio diversifier in a traditional stock and bond portfolio. The Bloomberg Commodity Index has exhibited a 16.2% 20-year annualized volatility, compared to the 19.6% for the S&P 500 TR Index.
Investors interested in diversifying their portfolios with broader commodities exposure can turn to ETF options. Aberdeen Standard Investments offers the actively managed Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (NYSEArca: BCI).
BCI tries to provide long-term capital appreciation that exceeds the performance of the Bloomberg Commodities Index. It may not invest in all the components of the benchmark but will hold similar interests to those included in the index, along with short-term investment-grade fixed-income securities, money market instruments, certain 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 1 and 3 months.
Financial advisors who are interested in learning more about opportunities in the commodities space can watch the webcast here on demand.