Hi VettaFi Voices! Commodities have seen outflows year to date overall, and some of the best performers have seen outflows. We discussed the “uncertain” economic environment last week, but what does that mean for how investors view commodities? Are investors scared of commodities right now? Can they be a good way to diversify a portfolio or hedge inflation? Are there better ways to get exposure than an ETF wrapper?
Todd Rosenbluth, VettaFi director of research: When I think of commodity ETFs, gold is what first comes to mind. Unfortunately, it has not been working for investors. Gold ETFs are all down fractionally for the year and down 6% in the past month, when the uncertain economic concerns became more top of mind.
The SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU) are the two largest ETFs, and they each have $2.2 billion of net outflows year to date, with money rushing out in the past month. While the lower-cost SPDR Gold MiniShares Trust (GLDM) has $450 million of net inflows this year, it had slight outflows in the past month. Others like the abrdn Physical Gold Shares ETF (SGOL) and the Goldman Sachs Physical Gold ETF (AAAU) have seen slight inflows this year. But this has not been a good year for the gold ETF industry.
Meanwhile, diversified commodity ETFs like the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), the Invesco DB Commodity Index Tracking Fund (DBC), and the First Trust Global Tactical Commodity Strategy Fund (FTGC) are down close to 3% for the year. And they too have experienced net outflows of between $400 million $600 million each.
Energy Commodities
While this ETF owns stocks and is not a commodity ETF, the Sprott Uranium Miners ETF (URNM) is notable. The miners ETF is up 37% this year. Nuclear energy is top of mind for many investors, with lots of new reactors under construction, particularly in Asia. Demand outstrips supply, and this Sprott ETF is a great way to tap into that.
Oil ETFs like the United States Oil Fund LP (USO) and the Invesco DB Oil Fund (DBO) are up around 8% in value as prices have spiked higher. I need Stacey Morris to help talk about the fundamentals here.
But USO has $750 million of net ouflows this year. Investors are not turning to commodities this year as an alternative to equity and fixed income allocations.
Stacey Morris, VettaFi head of energy research: There’s definitely a lot going on in oil markets at the moment. West Texas Intermediate (WTI) closed at a relative high of $93.68 per barrel (bbl) on September 27, and as of this writing, it’s around $83/bbl. The weakness has largely been driven by demand concerns tied to a worsening economic outlook. Wednesday’s weekly inventory report from the U.S. Department of Energy showed a big jump in gasoline inventories (up 6.5 million barrels), adding to concerns and triggering headlines on demand destruction.
Questions About Demand
Meanwhile, inventories at Cushing, Oklahoma, the pricing point for WTI, are at extremely low levels, which has led to more backwardation at the front of the curve. There’s been a lot of positioning and financial trading around what’s happening at Cushing. Arguably, some of the strength in oil in September likely came from short covering for WTI contracts. With demand concerns back at the forefront, oil has taken a big hit in a week, even though Saudi Arabia and Russia remain committed to their incremental cuts through the end of this year.
For more defensive energy exposure, investors may consider midstream/MLPs. The Energy Select Sector Index (IXE), which underlies the Energy Select Sector SPDR Fund (XLE), fell 7.1% for the week ended October 4 as oil tumbled, while the Alerian MLP Infrastructure Index (AMZI), which underlies the Alerian MLP ETF (AMLP), was down 4.0%.
Rosenbluth: Stacey, I’m not asking for investment advice, but what is the reward versus risk of getting energy exposure via an oil ETF like USO versus owning energy-stock-based ETFs. USO has outperformed XLE in 2023 but has lagged behind over the three-year period.
Morris: In short, USO can be more complex. It issues a K-1. Performance for USO can be impacted by the structure of the curve (contango versus backwardation), with backwardation typically more favorable. The relationship between oil and energy stocks isn’t always perfect, but I think focusing on ETFs of energy companies can be a good way to get exposure to the commodity. The nice thing about energy companies is that they are largely focused on free cash flow and returning cash to investors through dividends and buybacks. You don’t get those benefits from playing the commodity directly.
Don’t Dismiss Dividends
Rosenbluth: Good point. The barrel of oil is not paying a dividend ,let alone raising it like stocks inside AMLP are.
I’m looking through our database of commodities ETFs, and the KraneShares Global Carbon Strategy ETF (KRBN) jumps out as a positive performer. The fund owns carbon credit futures. It covers the major North American and European cap and trade programs.
Heather Bell, VettaFi managing editor: I feel like we’re overlooking agricultural commodities, though admittedly as a whole, they haven’t done much this year. Despite Ukraine’s role as a major grain producer, wheat prices are down. Based on this article from CNBC, it’s because Ukraine is finding ways to export despite the collapse of the Black Sea Grain Initiative, and production is better than expected.
But agricultural commodities are pretty important to human survival. And with all the unexpected weather events we’re having, that raises uncertainty around agriculture. That said, a lot of agricultural commodities are down year to date. The Invesco DB Agriculture Fund (DBA) is only up 6.4%, with a lot of the upside likely due to sugar — which is on a tear — and also the fund’s largest holding. The Teucrium Sugar Fund (CANE) is up roughly 53% during the same time period. I’m a sugar addict, so that increase makes sense to me!
The Crypto Angle
Roxanna Islam Swan, VettaFi asociate director of research: I think regardless of the current outlook, if you want exposure to commodities at any point, you’ll likely want an ETF. Buying physical commodities like metals is possible, but then you have to think about storing it. Other commodities are basically impossible to buy and store (like agricultural commodities). Futures can be complex. And while commodity producer stocks can be a good choice, it opens up exposure to a lot of idiosyncrasies that you may not want. Energy stocks might have some widespread popularity, but other commodity stocks are more difficult for the average investor to get into. I’m thinking of areas like gold mining stocks and crypto miners.
Rosenbluth: I knew crypto would find its way in here. I mean, we had the first ether futures ETFs launch this week.
Islam: And I think the bitcoin example is a good way to describe how people feel about commodities, because it’s in the news every day (and yes, most people consider bitcoin to be a commodity). You can buy physical bitcoin and store it in a private wallet, or you can buy it in your brokerage account as an ETF. Many investors would prefer the convenience of an ETF.
Commodities in Perspective
Rosenbluth: And you make a good point of the ease of use with a spot commodity ETF. Owning GLDM or AAAU is much easier than buying and hoping to sell gold bars at some point.
Islam: With the cost of housing lately, most people probably don’t have the square footage to have their own gold vault!
Also, commodities aren’t built equally. There’s actually pretty low correlation between different commodities and different supply/demand dynamics. It seems like more long-term investors lean toward more “mainstream” areas like gold and bitcoin, for example. Otherwise, many of the others are used as tactical tilts. Still, there’s an overall low correlation of commodities with stocks and bonds, so a main benefit is diversification. Remember that commodity allocations are usually small, like 5% of a portfolio, so they shouldn’t be as scary as they seem.
Rosenbluth: Yes, commodities can play a role in a portfolio, especially if the ETF is diversified. The Harbor Commodity All-Weather Strategy ETF (HGER) is a good example that has precious metals, grains, industrials, and energy exposure.
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