Investors can effectively diversify traditional portfolios with commodities exchange traded funds.
In the recent webcast, Industry Experts on Opportunities in Today’s Biggest Commodities, Helima Croft, Managing Director, Head of Global Commodity Strategy and MENA Research, RBC Capital Markets, outlined some of the current energy market dynamics, with the Organization of Petroleum Exporting Countries and its allies, or OPEC+, beginning to ease cuts.
RBC noted that Saudi Arabia is projecting improved price outlooks, with a focus on fiscal consolidation and ongoing Houthi attacks that could disrupt production. Other OPEC members are also experiencing a rebound in production, but the ongoing Covid-19 pandemic remains a constant constraining factor.
Kathy Kriskey, Product Specialist, Invesco; and Jason Bloom, Head of Fixed Income and Alternatives ETF Product Strategy, Invesco, argued that two main factors are currently supporting the commodities outlook: supply and demand and inflationary pressures.
Reflecting the supportive supply and demand outlook, oil is currently in a “strong cycle” with high demand and tight supply.
“We are now seeing the rare occurrence of both strong demand and tight supply simultaneously which hasn’t existed for over a decade,” Kriskey said.
“The current administration may have greater tolerance for elevated oil prices than the past administration, especially if this helps drive the widespread adoption of renewables,” she added.
Meanwhile, OPEC may show discipline in tapering its supply cuts. Mobility and product demand has picked up both seasonally and as result of the vaccine roll-out. Additionally, U.S. Shale has been disciplined about production growth and this could continue.
The Invesco strategists also highlighted strong commodity fundamentals as a result of the industrial metals, infrastructure, and electric vehicle buildout. They noted that infrastructure has seen an extreme shortfall in spending for the past 10+ years. Despite the fiscal cost of the pandemic, global governments are focused on infrastructure buildouts in two areas: climate change and digital investments. Furthermore, the new bipartisan infrastructure deal will put $1.2 trillion into infrastructure spending over an eight-year period. This should be supportive of industrial metals demand – construction, transport infrastructure, power infrastructure, and electric vehicles.
Specifically, the strategists predicted that the acceleration in green electrification trends is set to drive the strongest decade in copper demand growth post-2000. Copper’s physical properties of conductivity, durability, and ductility make it key for electrification and the world’s path to net zero emissions. Electric vehicles use about four times as much copper as traditional internal combustion vehicles, and renewable energy in general uses four to five times as much copper as traditional fossil fuel power generation.
On the supply side, copper supplies are already tight, and mines take time to come online. In addition, environmental compliance costs are higher today than in the past, further limiting new avenues of production.
Meanwhile, inflation could be allowed to run higher. Federal Reserve Chairman Jerome Powell has shifted away from a specific 2% target.
The extremely loose monetary and fiscal policies will also help fuel inflation ahead. The International Monetary Fund reported the debt-to-GDP ratio in advanced economies is 123%, or comparable to post-WW II levels. Governments might allow increasing inflation rates as deflation is dangerous when debt levels are high.
The expanding economy will also help fuel demand for raw materials. Expansionary policies aiding moderate income families could cause a boost to commodity demand, similar to the US War on Poverty in the 1960s and China’s expansion in the 2000s. Both of these events caused long-term commodity bull markets.
During periods of rising inflation, commodities have been a go-to asset class. They even can act as leading indicators of unexpected inflation. Meanwhile, equities and bonds tend to perform poorly when inflation is increasing.
As a way to gain exposure to the broad commodities space, investors can look to the Invesco DB Commodity Index Tracking Fund (DBC), which seeks to track the DBIQ Optimum Yield Diversified Commodity Index Excess Return plus the interest income from the fund’s holdings of primarily U.S. Treasury securities and money market income less the fund’s expenses.
The fund is for investors seeking a cost-effective and convenient way to invest in commodity futures. The index is composed of futures contracts on 14 of the most heavily-traded and important physical commodities in the world.
Additionally, the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NasdaqGM: PDBC) is a popular, actively managed commodity ETF play. PDBC tries to negate the negative effects of contango in the commodities market by selecting futures contracts with the highest implied roll yield.
PDBC invests in commodity-linked futures and other financial instruments that provide economic exposure to a diverse group of the world’s most heavily traded commodities. The fund seeks to provide long-term capital appreciation using an investment strategy designed to exceed the performance of DBIQ Optimum Yield Diversified Commodity Index Excess Return Index, an index composed of futures contracts on 14 heavily-traded commodities across the energy, precious metals, industrial metals, and agriculture sectors.
Financial advisors who are interested in learning more about the commodities market can watch the webcast here on demand.