With inflationary pressures still running hot, it’s not surprising that more investors are seeking alternatives to Treasury Inflation-Protected Securities (TIPS) to buffer portfolios against rising consumer prices.
Commodities are one such alternative, and a traditional one at that. Commodities have long been favored stopping points in inflationary times, and that utility rings true today. Take the case of the WisdomTree Enhanced Commodity Strategy Fund (GCC). Following a solid showing in 2021, the WisdomTree exchange traded fund is already up 5.48% year-to-date. Investors are embracing ETFs such as GCC.
“Commodities funds have also seen renewed investor interest. Funds in the commodities broad basket Morningstar Category gathered $8.5 billion in net new assets in 2021,” says Morningstar’s Ben Johnson. “This is the largest amount of inflows the category has seen since 2009, when commodity prices surged from their postcrisis lows and inflation fears were running high.”
As Johnson notes, commodities are good hedges against inflation, but the conundrum many investors face is twofold. First, timing inflation is difficult. Second, resulting from the first, knowing exactly how much of a portfolio to allocate to commodities is tricky, too.
The other issue investors contend with is knowing which commodities are the best inflation-fighting vehicles. Gold has that reputation, and it’s familiar to a broad swath of investors, but the yellow metal disappointed last year. That underscores the utility of GCC’s broad-based approach. The actively managed ETF currently holds nearly 40 futures contracts, including a sprinkling of bitcoin.
“The biggest difference between much of the research on commodity futures and the investable funds underpinned by broad commodity futures benchmarks has to do with portfolio construction,” adds Johnson.
GCC’s status as an active fund could prove beneficial to investors. Among index-based commodities funds, there’s little uniformity in how futures are rolled and how those contracts are rebalanced. That leads to wide divergences in returns, making it difficult for investors to make apples-to-apples comparisons among passive offerings in this category.
As an active fund, GCC doesn’t have to be heavily allocated to front-month contracts. In fact, many of the contracts currently held by the fund expire in the back half of this year, potentially minimizing roll yield, which is one of the biggest drains on long-term commodities futures performance.
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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.