Commodities Can Be Investors' Best Friend When Inflation Rises

After three consecutive notable increases in monthly Consumer Price Index (CPI) data, it’s not a stretch to say plenty of investors are tiring of inflation data.

The problem is, even if inflation is transitory, it’s still a topic du jour and unlikely to abate anytime soon. Good news: Commodities earn their stripes in inflationary environments. Investors can access the asset class in broad fashion with the Invesco DB Commodity Index Tracking Fund (DBC) and the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC).

Either exchange traded fund is applicable today because commodities historically help investors guard against the erosive effects of declining purchasing power.

“. As a result, holding onto cash or being in an investment that doesn’t keep up with inflation is a losing proposition. One way to help combat this threat is by having an allocation to commodities,” according to Invesco research.

Evaluating DBC and PDBC

Even if inflation disappears tomorrow (probably won’t), there’s still a near- to medium-term case for either DBC or PDBC because the funds are levered to the global economic reopening.

“Both of these products can potentially benefit from the economic growth because of their 55%-60% exposure to energy,” notes Invesco. “Demand for oil, which is considered ‘energy’ in this instance, may grow from the reopening as more cars hit the road and airline traffic increases.”

The $2.45 billion DBC, which debuted in February 2006, follows the DBIQ Optimum Yield Diversified Commodity Index and is usually comprised of 14 actively traded commodities futures contracts. These days, DBC is heavily allocated to energy commodities, with West Texas Intermediate, Brent crude, and unleaded gasoline futures combining for over 43% of the fund’s weight.

DBC also offers some buffer against rising food costs as agriculture commodities, including soybeans and wheat, combine for about 20% of the roster.

On the other hand, the $6.34 billion PDBC is an actively managed fund and seeks to beat the index the passive DBC follows. PDBC roster includes many of the same contracts found in DBC, but the allocations are different.

“PDBC, meanwhile, uses a more active strategy, which may be attractive to investors who are looking for a fund that attempts to select the most promising commodity futures at any given time,” according to Invesco.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.