Even though the Federal Reserve isn’t looking to raise interest rates until 2023, commodities can still provide a portfolio with asset diversification with funds like the Invesco DB Commodity Index Tracking Fund (DBC).
The fund seeks to track changes, whether positive or negative, in the level of the DBIQ Optimum Yield Diversified Commodity Index Excess Return™ (DBIQ Opt Yield Diversified Comm Index ER or Index) plus the interest income from the Fund’s holdings of primarily US Treasury securities and money market income less the Fund’s expenses. The Fund is designed for investors who want a cost-effective and convenient way to invest in commodity futures.
The Index is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. The Fund and the Index are rebalanced and reconstituted annually in November.
Oil prices have been on the rise after rallying from last year’s volatile, pandemic-ridden year. DBC’s largest holding consists of WTI Crude futures, giving investors exposure to rising oil prices as well as gasoline futures.
A Commodities Comeback
That comeback in oil prices and, subsequently, gasoline prices, highlights an even bigger comeback for commodities as a whole. Inflationary pressures are also paving the way for investors to use commodities as a hedging alternative.
“Commodities bounced back Monday after a drubbing last week triggered by an increasingly inflation-wary Federal Reserve,” a Barron’s article said. “Both history and fundamentals show the one-day rally could be turned into an honest-to-goodness winning streak, according to strategists.”
The Fed’s recent meeting may have halted some of the momentum in commodities, but the longer-term thesis is still positive.
“The Fed, however, signaled two possible rate hikes in 2023 and acknowledged that members have started to discuss tapering—or reducing—the size of its bond purchasing program,” the Barron’s article said. “That caused bond yields to tumble and the U.S. dollar to rise, both negative for commodities, which are priced in the greenback.”
“But tapering might not be too damaging to the commodities complex,” the article added. “During the ‘Taper Tantrum’ in 2013, brought on by the Fed’s abrupt decision to reduce its bond purchases, the Bloomberg Commodity Index fell just over 2% in three months, from the end of May to the end of August, according to Gavekal Research. That was the second-best performance—behind the S&P 500 —out of 12 assets that Gavekal tracked for that time period.”
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