Investors should consider diversifying with exchange traded fund strategies that access commodities in the current market environment.
In the recent webcast, Commodities: A Bright Spot in Recession Darkness, Robert Minter, director of ETF investment strategy at abrdn, noted that most issues remain or are getting rose, such as the energy crisis creating materials scarcity, open conflict between former trading partners, DM countries without commodity access, and mandatory energy blackouts. These types of factors continue to shape the global markets and how commodities are now taking more leading roles.
Looking at long-term trends, Minter pointed out that the inflation and deflation cycles historically average 18 years, so the current inflation uptrend could continue to support the commodities market for some time.
Minter underscored the ongoing divergence between supply and demand when gauging market fundamentals. For example, in the energy space, inventories are low, with U.S. crude and government stockpile inventories shrinking. There is also no real quick solution to turn around the energy market fundamentals.
According to the latest Dallas Fed Energy Survey, exploration and production firms highlighted several negative factors that will continue to weigh on supply. For example, government animosity toward the industry makes companies reluctant to pursue new projects. The current administration declared war on fossil fuels before going into the office, and they have continued that war to this day.
The disruption to global supply chains has also contributed to elevated pricing pressures. For example, in the natural gas space, U.S. natgas markets may be trading around $9 per million British thermal units, but Asian markets are trading around $69, and the Netherlands TTF natural gas market was up to $337. This ongoing disparity could help incentivize U.S. liquefied natural gas exports, but the new demand on U.S. natgas will cause prices to rise here at home.
Minter also argued that even if the economy dips into a recession, it does not mean investors should be dumping commodities. In the past seven recessions pre-Covid, markets took an initial dip alongside the broader selling pressure, but commodities have strengthened in the recovery process.
As we look at the various factors that will continue to support the commodities market outlook, Minter highlighted supports like low industry investments, low inventory levels, low spare capacity, low investor positioning, policy headwinds on production, global weather patterns that support higher pricing, China policy support for demand and dollar weakness.
When looking at the commodities space, Steven Dunn, head of exchange traded funds at abrdn, argued that the asset class is a potential diversifier to traditional equity and fixed-income portfolios. Commodities have historically exhibited a low correlation to major equity and fixed-income benchmarks. The Bloomberg Commodity Index has shown lower historical annualized volatility compared to the S&P 500 and the broader MSCI World Index.
The Bloomberg Commodity Index exposure may also provide investors with greater diversification benefits within the commodity asset class since the benchmark takes a less heavy or overweight approach to energy exposure.
Investors interested in diversifying their portfolios with broader commodities exposure now have several ETF options available to them. For example, abrdn 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 components of the benchmark, but it 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 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.
Additionally, the abrdn Bloomberg Industrial Metals Strategy K-1 Free ETF (BCIM) offers exposure to the more targeted industrials metals segment. BCIM seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Bloomberg Industrial Metals Total Return Subindex. The Index consists of four commodities futures contracts concerning aluminum, copper, nickel, and zinc.
Financial advisors who are interested in learning more about the commodities market can watch the webcast here on demand.