Commodities Drag on Demand Expectations | ETF Trends

By Roland Morris
Portfolio Manager and Strategist, Commodities

As signs of a global economic slowdown became increasingly clear, investors downgraded demand expectations for most commodities.

Macro Outlook: Investors’ Sentiments Weigh on Commodities’ Road to Recovery

The UBS Constant Maturity Commodity Index (CMCI) and other commodity index strategies slumped during the month of September. The continued aggressive tightening of the U.S. Federal Reserve (Fed) and the resulting U.S. dollar strength weighed on investors’ sentiments. As signs of a global economic slowdown became increasingly clear, investors downgraded demand expectations for most commodities.

CMCI declined by 5.5% in September but remains up 8.4% year-to-date. The Bloomberg Commodity Index (BCOM) declined by 8.1% in September and remains up 13.6% year-to-date. U.S. natural gas continues to be the most important factor driving the difference in relative CMCI vs BCOM performance. By index design, CMCI rebalances individual commodity exposures back to target weightings monthly. BCOM, by index design, only rebalances exposures annually. CMCI’s monthly reweighting methodology has reduced volatility and improved relative performance vs BCOM. This year, however, it has detracted from relative performance. BCOM ended September with an approximately 18% weighting to U.S. natural gas while CMCI ended September with its reweighted target exposure of 3.5% to U.S. natural gas. U.S. natural gas was the primary reason for CMCI’s positive relative performance in September vs BCOM and is also the primary reason for the year-to-date underperformance vs BCOM.

Index & Sector Review: Energy Struggles from Falling Natural Gas Prices

The energy sector was the worst-performing sector in September; overall, down by 11%. U.S. natural gas led the sector decline, falling 20%. WTI and Brent crude oil fell 10% in the month. Natural gas peaked at the end of August when Russia shut down the gas flowing through the Nord Stream 1 pipeline. Despite the destruction of the Nord Stream 1 and 2 pipelines in September, natural gas prices declined sharply from the late August peak in September. This was a classic example of “buy the rumor, sell the news” trading action.

The industrial metals sector fell 4.7% led by a 6.7% decline in aluminum prices. The industrial metals sector is considered the most economically sensitive sector. Rising U.S. interest rates and the strong U.S. dollar have pressured the sector throughout the month.

Agriculture fell 1.6% in September led by a 23% decline in cotton prices which was offset by a 9% jump in wheat prices. The Russia-Ukraine war continues to support wheat prices. Livestock prices fell 4.2% led by a drop of 8.5% in lean hog prices. Precious metals fell 1.3% led by a 1.2% decline in gold and partly offset by a 6.6% rally in silver prices.

Roll Yield Estimates

Roll Yield Estimates

Source: Bloomberg as of September 30, 2022.

Learn more about the VanEck CM Commodity Index Fund, which seeks to track, before fees and expenses, the CMCI.

Originally published by VanEck on October 13, 2022. 

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Source: VanEck as of September 30, 2022.

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UBS Bloomberg Constant Maturity Commodity Index (CMCI) is a total Return rules-based composite benchmark index diversified across 27 commodity components from within five sectors, specifically energy, precious metals, industrial metals, agricultural and livestock.

BCOM provides broad-based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro-economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.

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You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes or political or regulatory developments. The value of a commodity-linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. The Fund is subject to the risks associated with its investments in credit, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, counterparty, debt securities, derivatives, index tracking and data, industry concentration, money market funds, management, market, operational, regulatory, repurchase and reverse repurchase agreements, subsidiary risks and U.S. government securities.. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation, liquidity, interest-rate, valuation and tax risks. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by the Fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity-linked derivative instruments may subject the Fund to greater volatility than investment in traditional securities.

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