Commodities Could Be Reliable Predictor of Global Economy

The recent trade war activity may have burned an image of volatility in investors’ minds that could drive their decisions with their portfolios for the rest 2019. As far as being a predictor of what may happen in the global economy, commodities might actually be a more reliable crystal ball.

“Notwithstanding the recent correction associated with renewed trade tensions between the U.S. and China, a strong start to the year for global equity and commodities markets suggests a strong macroeconomic backdrop and a high risk appetite among investors,” wrote Fiona Boal, Head of Commodities and Real Assets of S&P Dow Jones Indices. “However, when drilling down into the performance of individual commodities sectors, it is clear that the situation is much more nuanced.”

During the bout of volatility that took hold of the capital markets near of the end of 2018, stocks and bonds did something they don’t normally do–exhibit positive correlation. As equities were getting roiled with volatility, the tried and true safe haven of Treasuries were falling as yields were climbing.

This lockstep between stocks and bonds was not something typically seen within the capital markets as both are prone to marching to the beat of their own drum. However, the music they were making was something analysts were listening to closely, but something investors would like to ignore.

Commodities, however, lack correlation to both stocks and bonds–something investors will appreciate moving forward as a volatility protection measure.

“The latter part of the global economic cycle is typically characterized by the outperformance of industrial commodities, namely energy and industrial metals,” Boal wrote. “While commodities are not anticipatory assets, they can provide a useful insight into current macroeconomic conditions on top of any commodities-specific supply and demand dynamic. It is imperative that investors take stock of the myriad of indicators presented by commodities markets, especially given growing economic and geopolitical turbulence.”

Commodity ETFs to Play

For investors looking for commodity ETFs, the Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (NYSEArca: BCI) could be a prime alternative.

BCi seeks to provide a total return designed to exceed the performance of the Bloomberg Commodity IndexSM, which is calculated on an excess return basis—-the first of its kind since its inception in the first quarter of 2017. BCI is actively managed and seeks to provide a total return designed to exceed the performance of the index.

With BCI offered at 25 basis points, it also offers a cost-effective solution to providing investors with exposure to commodities. Additionally, there are no K-1 tax documents issued, which is a requirement for investments in partnership interests.

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