Commodity investing can help add an extra bit of portfolio diversification. Investors who don’t know where to start can try an actively managed fund via the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC).
Commodities help provide an indication of how healthy the economy is, irrespective of what the stock market is doing at the time. Right now, the Bloomberg Commodity Index is up about 9% so far in 2021, portending signs of an economic recovery.
“Continued investor interest in commodities signals a belief that the economic recovery is still underway, even if stocks are taking a breather,” a MarketWatch report said.
By using an active management strategy, PDBC seeks long-term capital appreciation. The fund seeks to achieve its investment objective by investing in a combination of financial instruments that are economically linked to the world’s most heavily traded commodities.
Commodities are assets that have tangible properties, such as oil, agricultural produce, precious metals, or raw metals. They give investors alternative assets that are relatively uncorrelated to broad stock market indexes.
Furthermore, PDBC offers exposure to commodity futures without the tax hassle of a K-1. The fund also attempts to avoid ‘negative roll yield’, which could erode returns over time.
3 Big Advantages to Commodity Investing
Fidelity notes three advantages to commodity investing: diversification, potential returns, and a hedge against inflation. However, investors must also understand the risks involved, such as volatility, international risks, and asset concentration.
In terms of diversification, “over time, commodities and commodity stocks tend to provide returns that differ from other stocks and bonds. A portfolio with assets that don’t move in lockstep can help you better manage market volatility.”
Commodities can provide potential returns since “prices can fluctuate due to factors such as supply and demand, exchange rates, inflation, and the overall health of the economy.” Furthermore, “a rise in commodity prices has had a positive impact on the stocks of companies in related industries.”
There’s been a lot of noise lately regarding inflation fears with Treasury yields rising. One way to counteract rising inflation has been to invest in commodities.
“Inflation—which can erode the value of stocks and bonds—can often mean higher prices for commodities,” Fidelity concluded. “While commodities have shown strong performance in periods of high inflation, investors should note that commodities can be much more volatile than other types of investments.”
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