Finding the right inflation commodities strategy has been one of the key challenges in investing this year, much as it was back in the 1970s. Whether or not one believes that Fed Chair Jerome Powell is himself too stuck in that era, investors can look back to the inflationary decade for lessons about one of the investment styles to consider right now, commodities, according to a report from WisdomTree titled “Volatility Remains a Market Constant.”
The report’s research highlights that commodities don’t just do well tied to expected inflation, but even during “unexpected” inflation, which analysts indicate in a proxy measure by subtracting the treasury bill interest rate from the realized inflation rate. Treasuries, the analysis suggests, may have a positive beta to expected inflation, but its beta to unexpected inflation is negative.
As a hedge against rising prices, commodities can provide high and positive beta to inflation, available in an inflation commodities strategy like the WisdomTree Enhanced Commodity Strategy Fund (GCC). The strategy is a long-only commodity strategy that offers actively-managed exposure to four commodity types: energy, agriculture, industrial metals, and precious metals.
The inflation commodities strategy uses futures contracts and considers 25 individual commodities within the four sectors, with the selection and weighting based on things like the broader economic outlook, single commodity forecasts, and liquidity.
GCC’s added $44 million in net inflows over one year, hitting a bumpy patch in the early Fall before adding another $8 million in net inflows over one month. The strategy has outperformed its Factset Segment Average over one month and over three months. It also offers an annual dividend yield of 9.5%, at least 800 basis points more than the annual dividend yield offered by other strategies in its ETF Database Category Average or its Factset Segment Average.
2023 is looking to be quite an uncertain year, and after a year that saw war return to mainland Europe, it’s hard not to think of all sorts of challenges both geopolitical and inflationary. Still, commodities are a traditional defensive play and an inflation commodities strategy like GCC may be a candidate for those looking for a long play approach to inflation.
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