Commodity ETFs Navigate Choppy Seas

April 17, 2018

With all the attention on stocks and bonds this year, you wouldn’t be blamed for forgetting about commodities. There’s been a headline or two about oil, aluminum and gold, but for the most part, the asset class remains under the radar for investors.

That’s understandable—in recent years, returns for commodities have been paltry compared to stocks and bonds. For example, last year, the average broad commodity ETFs had a return of 4.4%, well below the 22% advance for the SPDR S&P 500 ETF Trust (SPY) and not much better than the 3.6% gain for the iShares Core U.S. Aggregate Bond ETF (AGG).

Over the past five years, the difference is even more stark, with broad commodity ETFs down an average of 40%, compared to gains of 107% and 11% for SPY and AGG, respectively.

That said, as the old market adage goes, past performance is no guarantee of future results. As poorly as commodities have done in recent years, so far in 2018, they’re doing quite well, and some analysts believe their outperformance can continue.

Modest Gains

A look at year-to-date performance for broad commodity ETFs in 2018 reveals that over half the funds are up. Gains are modest, only a percent or two, but that beats equities, which were down 0.1% as of the end of the first quarter, and bonds, which were down 1.8% in the same period.

The $115 million GS Connect S&P GSCI Enhanced Commodity TR Strategy ETN (GSC) and the $32 million iPath S&P GSCI Total Return Index ETN (GSP) were the best performers so far this year, with gains of 3% and 2.6%, respectively.

 

Top 5 Commodity ETFs
Fund Ticker Q1 Performance
(%)
iPath Bloomberg Cocoa Subindex Total Return ETN NIB 38.2
iPath Pure Beta Cocoa ETN CHOC 35.0
iPath S&P GSCI Crude Oil Total Return ETN OIL 11.8
DB Crude Oil Long ETN OLO 11.3
Credit Suisse X-Links WTI Crude Oil ETN OIIL 10.3

Note: Data measures Q1 performance and excludes leveraged and inverse ETPs

 

On the other hand, the $171 million ETFS Bloomberg All Commodity Strategy K-1 Free ETF (BCI) and the $1.1 billion iPath Bloomberg Commodity Index Total Return ETN (DJP) were among the worst performers so far this year, with losses of less than 1%.

 

Bottom 5 Commodity ETFs
Fund Ticker Q1 Performance
(%)
iPath Bloomberg Sugar Subindex Total Return ETN SGG -20.2
iPath Pure Beta Sugar ETN SGAR -15.4
Teucrium Sugar Fund CANE -15.0
iPath Bloomberg Aluminum Subindex Total Return ETN JJU -14.1
iPath Bloomberg Livestock Subindex Total Return ETN COW -11.8

Note: Data measures Q1 performance and excludes leveraged and inverse ETPs

 

There’s often a wide variation between the performance of various broad commodity ETFs due to different strategies and commodity weightings schemes.

S&P GSCI Outperforming

In general, ETFs that track the S&P GSCI, which is a global production-weighted index that’s heavy on energy, are doing the best this year. That outsized weighting in energy has paid off thanks to a strong 7.5% rally for WTI oil and a 12.2% jump in gasoline prices.

Meanwhile, the ETFs that track the Bloomberg Commodity Index aren’t doing as well this year due to their heavier weightings in metals, a sour spot in this year’s commodities market.

Year-to-date, aluminum is down 11.9%; copper is down 8.4%; and palladium is down 11.1%. The lone bright spot is gold, which has crept up by 1.7% so far this year thanks to rising financial market volatility.

Agriculture—the other major commodity sector—has performed solidly this year, with gains of more than 5% for corn, soybeans and wheat, as well as a spectacular 35% rally for cocoa.

Late Cycle

Looking ahead, a number of analysts see commodities continuing to outperform as the global economy enters the late cycle.

“We typically see commodities outperform stocks and other risk assets in the late stages of a business cycle,” said Maxwell Gold, director of investment strategy and research at ETF Securities. “Right when we're beginning to see capacity overshoot and we hit a slowdown in equity markets, commodities perform better.”

 

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