Commodities exchange traded funds may be a critical component of a well-balanced investment portfolio, providing for a longer-term, strategic opportunity.
In the recent webcast, Pandemic, Inflation, Infrastructure: All Signs Point To Commodities, Aberdeen’s Robert Minter, director of ETF investment strategy, and Stan Kiang, director of strategic accounts, highlighted several themes that continue to support the commodities outlook, such as infrastructure spending, renewable energy shift, adoption of electric vehicles and supply issues.
For starters, updating and expanding infrastructure in both the U.S. and worldwide will require vast amounts of investments and raw materials. For example, there is a projected $3.36 trillion public and private infrastructure spending gap for roads alone. The U.S. will still need to invest in building out other infrastructure sectors like electricity, airports, telecommunications, rail, water, and ports.
The ongoing shift toward renewable energy will also be heavily dependent on industrial metals, notably copper. For example, battery electric vehicles require 183 pounds of copper content, compared to 48 pounds for internal combustion engine vehicles. There are 5.5 tons of copper per megawatt in solar power systems. A 3-megawatt wind turbine contains up to 4.7 tons of copper.
It is not just copper that will be in high demand as we adopt technology innovations to support our shift toward renewables. For example, Tesla electric vehicles require massive single-piece rear castings made of aluminum. Global use of zinc is primarily used for galvanizing steel for weather exposure in renewables and infrastructure. Nickel shows high demand among stainless steel, chemical, pharmaceutical, fertilizer, hospital, restaurant, and sanitary uses.
Meanwhile, on the supply side, issues stemming from environmental and social causes could slow mining supplies for renewables. For instance, copper mines now take 10+ years from planning to production. China has capped Aluminum output to limit coal use and meet climate goals. Chile imposed significant new taxes on copper miners. Mining labor strikes increased in 2021, demanding new pay hikes.
Commodities have also been a source of diversification for a traditional stock and bond portfolio. The abrdn strategists pointed out that commodities have historically exhibited low correlations to other asset classes such as equities and fixed income. The Bloomberg Commodity Index has also exhibited a 16.2% 20-year annualized volatility, compared to the 19.4% for the S&P 500 TR Index.
Investors interested in diversifying their portfolios with broader commodities exposure can turn to ETF options. Aberdeen Standard Investments offers the actively managed Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (NYSEArca: BCI).
BCI tries to provide long-term capital appreciation that exceeds the performance of the Bloomberg Commodities Index. It may not invest in all the benchmark components but will hold similar interests to those included in the index, along with short-term investment-grade fixed-income securities, money market instruments, certain bank instruments, and cash or other cash alternatives. The underlying Bloomberg Commodities Index tracks the price of rolling positions in a basket of commodity futures with a maturity between 1 and 3 months.
Financial advisors who are interested in learning more about the commodities market can watch the webcast here on demand.