Commodity ETF investors should monitor inflation as rising inflationary pressures have been historically good for the hard assets market.
“They have different drivers, but now, a lot of things are moving up. I think the common thing I would look at if Ii were an advisor is inflation and your expectation for inflation,” John Love, President and CEO of United States Commodity Funds, said at the Inside ETFs 2018 conference. “We know commodities do extremely well in high inflation environments or when there is even movement toward inflation or inflation shock, especially unexpected inflation. So I think if there is any concern about inflation, look into commodities.”
Investors who are interested in broad exposure to the commodities market may look to something like the United States Commodity Index Fund (NYSEArca: USCI). USCI eschews rolling front month contracts, which can lead to underperformance, especially in a contangoed market, rebalancing each month and selecting the most-backdated contracts and then the seven highest-returning contracts.
Specifically, the commodities ETF tries to reflect the performance of the SummerHaven Dynamic Commodity Index Total Return Index, which consists of 14 commodity futures. The index is reformulated each month from 27 possible futures contracts. The 14 selected contracts are equally weighted and represent six sectors: Energy (WTI crude oil, Brent crude oil, natural gas, heating oil, gasoil, RBOB gasoline), Precious Metals (gold, silver, platinum), Industrial Metals (aluminum, copper, lead, nickel, tin, zinc), Grains (corn, soybeans, soybean meal, soybean oil, wheat), Livestock (live cattle, feeder cattle, lean hogs) and Softs (coffee, cocoa, cotton and sugar).
The portfolio currently consists of the following futures contracts: Crude Oil (Brent) FEB19, Gas Oil DEC 18, Live Cattle JUN18, Crude Oil (WTI) MAR19, Heating Oil MAY18, Soybean Meal OCT18, Nickel APR18, Copper FEB19, Tin MAY18, Cocoa MAY18, Zinc AUG18, Gold AUG18, Sugar(#11) MAY18 and Cotton JUL18.
“We think if you are looking for inflation protection and diversification, USCI is the one to look at,” Love added.
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.