Roll Yields Boosting Commodities ETFs in 2022 | ETF Trends

Strong demand, crimped supplies, inflation, and geopolitical tensions are among the factors elevating commodities to the top spot among the various asset classes in 2022. Exchange traded funds are getting in on the act.

For example, the Invesco DB Commodity Index Tracking Fund (DBC) is higher by 24.35% year-to-date. DBC, which tracks the DBIQ Optimum Yield Diversified Commodity Index, is benefiting from the aforementioned factors as well as its status as a diversified commodities ETF and robust roll yields.

In simple terms, roll yield is the difference between the profit or loss on a commodity’s futures contract and what the spot price of the underlying commodity is.

“Consistent with lower inventories, most major commodity markets are in a state of backwardation (forward prices are lower than spot prices), which is the single strongest historical predictor of forward returns,” according to PIMCO.

The current roll yield for the Bloomberg Commodity Index is north of 5%, far outpacing the yield on 10-year Treasuries and the dividend yield on the S&P 500. As PIMCO notes, that roll yield is as high as it’s been in almost two decades. That prior iteration of elevated roll yields gave way to a prolonged period of substantial upside for commodities. Of course, inflation is also supporting the case for funds like DBC.

“To be sure, while nominal asset classes such as equities and fixed income have had a negative response to inflation surprises, real assets such as commodities have historically tended to be effective as inflation hedges. For a 1% unexpected change in inflation, commodities have historically delivered excess returns of over 8%,” adds PIMCO.

Commodities also act as solid portfolio diversification tools, owing to the asset class’s historically low correlations to bonds and equities. To the point of diversification, DBC features exposure to 14 commodities futures.

Fortunately, nearly a quarter of the fund is allocated to Brent and West Texas Intermediate crude oil, while more than 5% is directed to natural gas. DBC also has a 7.21% weight to gold positions on what’s been an impressive rebound by the yellow metal to start 2022.

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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.