As the economy improves and the investing outlook changes, market participants should consider ways to diversify their portfolios in case of sudden turns. Investors may consider alternative investments like commodity exchange traded funds that may help capture opportunities ahead and cushion against slips in traditional assets.
On the recent webcast (available On Demand for CE Credit), What You Should Know About Commodities Now, William Rhind, Founder and CEO of GraniteShares ETFs, argued that investors should consider commodities due to the current rebalancing supply and demand dynamics, rising inflation outlook and portfolio diversification benefits.
The current supply and demand appear favorable for a rally in prices after the multi-year weakness in the broad commodities market.
Headline inflation has also remained depressed for a prolonged period, with inflation hovering near a low range since the late 1970s. Looking ahead, experts project inflation will break 2% in 2018 from their current levels due to a number factors like changing geopolitical and monetary factors, higher prices for domestic goods in a more protectionist environment, stabilizing oil prices that would mitigate expectations for lower inflation and a close to fully employed U.S. economy.
Nevertheless, there may be unexpected turns that could cause inflation to spike beyond what many anticipate, and many have grown complacent in a low inflation environment.
“Being that commodities are at relatively cheap compared to historical values, it may make sense to hedge your portfolio of these risks beforehand, not afterwards,” Aaron Gilman, Chief Investment Officer of Independent Financial Partners (IFP), said, adding that commodity futures typically outperformed during periods of unexpected inflationary risks.
Commodities have historically acted as a good portfolio diversifier that zigs while traditional assets like stocks and bonds zag. For instance, the Bloomberg Commodity Index has exhibited a 0.37 correlation to the S&P 500 and a -0.20 correlation to the BarCap Aggregate Bond Index. The S&P GSCI Index shows a 0.40 correlation to the S&P 500 and a -0.28 correlation to the BarCap Aggregate Bond Index.
“Commodities have low correlation to other asset classes,” Rhind said. “Including commodities in a portfolio may reduce risk through diversification, especially in an inflationary environment which can erode equity and bond prices.”
Moreover, potential commodity investors may be entering the market on the cheaper end. The Bloomberg Commodity Index is current trading at around the 82 level compared to its historical mean of 127 while the S&P GSCI Index is trading at around 378, compared to its mean of 534.
Investors interested in the commodities theme have a number of easy-to-use, broad commodity-related ETF options to choose from. However, Rhind warned that these older legacy funds can be costly, structured inefficiently and burdensome at tax time. Since most of the more popular and older commodity ETFs trade in futures contracts, investors may have make additional considerations come tax season.
Alternatively, investors can look to the recently launched actively managed GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (NYSEArca: COMB) and GraniteShares S&P GSCI Commodity Broad Strategy No K-1 ETF (NYSEArca: COMG), which are benchmarked to the Bloomberg Commodity Index and S&P GSCI Index, respectively. The funds are structured as 1940 Act funds, do not issue K-1s, and are two of the lowest cost broad commodity ETFs in the U.S. market with total fund operating expenses of 0.25% and 0.35%, respectively.
“Both of these ETFs can be used to access broad commodity exposure in portfolio, but each ETF has its strengths,” Rhind added. “COMB’s provides portfolio allocation for diversification. COMG provides potential for protecting against inflation.”
Financial advisors who are interested in learning more about the commodities market can watch the webcast here on demand.