Everyone is focusing on equities as the stock market rally pushes into 2018. However, investors shouldn’t ignore other asset classes as it may be time for commodity ETF to shine.
“The economic conditions are ripe for a broad commodities rally in 2018. They may be among the best performing asset classes by year end, perhaps even beating domestic equities as quantitative tightening threatens to put a damper on the 9-year bull run,” Maxwell Gold, director of investment strategy at ETF Securities, said in a note.
Specifically, Gold points to three contributing factors to support commodities ahead: Global manufacturing may push commodity demand higher. Investors have yet to regain their previous positions in commodity funds. Commodities tend outperform in high growth and inflationary periods.
Global gross domestic product is expected to increase to 3.9% this year, according to the International Monetary Fund, with reflationary signals coming out of global manufacturing and industrial activity. The recent global manufacturing Purchasing Managers’ Index levels were at a four year high while US manufacturing PMI ended 2017 at 59.7 after touching a 13 year high in September 2017. This greater manufacturing activity could translate to increased commodities demand, especially for the raw materials needed to fuel the rising economic activity.
Meanwhile, as commodity fundamentals improve, more investors may take notice. Investor flows reveal that many have only recouped half of their previous holdings with net inflows of $14 billion since January 2016. As the commodity outlook strengthens, investor interest may further support pricing ahead.
Lastly, periods of high growth and high inflation have historically been beneficial for commodities, which may reflect rising commodity demand at later stages of an economic cycle.
Investors interested in diversifying their portfolios with commodities exposure have a number of ETF options available to them. ETF Securities came out with a line of ETFs to outperform the widely observed Bloomberg Commodity Indices without the need to worry about troublesome K-1 forms come tax season, including the actively managed ETFS Bloomberg All Commodity Strategy K-1 Free ETF (NYSEArca: BCI) and ETFS 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 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.
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 position in a basket of commodity futures with a longer maturity between 4 and 6 months.
For more information on the commodities market, visit our commodity ETFs category.