Commodity ETFs Have Their Moment

May 11, 2021

It has been a great time to be a commodity ETF investor. 

From oil to metals to lumber to grains, every part of the commodity segment—with the exception of gold—has been rising since the beginning of the year, feeding hopes of a growth cycle ahead. When was the last time commodities offered such a thrill?

 

Big Picture

The global pandemic sits front and center in this turn of events for this segment—first as the catalyst for massive price declines due to economic shutdowns across the globe, and more recently as the fuel for a demand-driven rally that has commodities of all types surging.

The specific drivers of a recent pickup in performance vary depending on the commodity, but the broader story is universal: Supply and demand are at an imbalance, and demand is winning.

Whether it’s weather-related crop output concerns, or lingering supply chain disruption, the supply side of the conversation is in question at a time when the economic post-pandemic reopening trade is taking shape. Economic activity will most certainly fuel demand for all sorts of goods and services, and commodities are at the center of that.

Oil’s Rally

Take oil. Demand growth for oil is anything but linear, and it remains unclear as countries around the world battle the pandemic at an uneven pace. It turns out that reopening—the pickup in economic activity that will boost consumption—is coming in fits and starts.

Supply-side narratives are also a mixed bag. OPEC’s oil output is said to be at three-month highs due to Iran’s increased production (official numbers come later this week.) On the flip side, there’s an ongoing shutdown at one of the largest U.S. oil pipelines, Colonial Pipeline, feeding concerns about near-term supply, especially of gasoline.

Yet some analysts are calling for WTI Crude Oil to test the $70/barrel mark in the near future, a target that’s more than $5 away from current price levels. Keep in mind that, in April 2020, we saw WTI oil futures fall into negative territory. (Read: Stunningly, Oil Prices Crash Below Zero)

The United States Oil Fund LP (USO) is sitting near one-year highs, up nearly 35% year-to-date, and more than 100% in the past 12 months. The United States Gasoline Fund LP (UGA) too is flirting with its highest levels since late 2018, up nearly 40% in 2021. The fund has now seen gains of more than 122% in the past year.

These ETFs track futures contracts on these commodities, and offer investors some of the closest-to-spot-price performance available in ETF wrappers.

 

USO & UGA 1-Year Returns

 

Grains A Similar Story

The grains and oilseeds complex—including corn and soybeans—are also buoyed by a strong demand story at a time when weather in key growing regions has been challenging for crop development. Bad weather hurts crop yields, putting a damper on supply projections—that’s good news for commodity prices. Also good for prices is expectations of higher demand ahead.

The Teucrium Corn Fund (CORN) is trading at its highest levels since mid-2016, up some 42% so far in 2021. The Teucrium Soybean Fund (SOYB) is back to levels not seen since mid-2014. These are multiyear highs—a refreshing change for this battered segment of commodities.

 

CORN & SOYB 1-Year Returns

 

Another way to look at this part of the market is through broader agricultural commodity ETFs such as the Invesco DB Agriculture Fund (DBA). DBA picks futures contracts along the curve for various commodities, including corn, soybeans, wheat, Kansas City wheat, sugar, cocoa, coffee, cotton, live cattle, feeder cattle and lean hogs. It's the ag commodites basket for those who don't want to express views on individual markets but on the segment as a whole. The $1 billion fund has already gathered some $250 million in net inflows this year.

Base Metals Burning Hot

Iron ore. Lithium. Nickel. Copper. All base metals. All on fire. Signs of a strong pickup in demand as the economic reopening triggers consumption are driving this segment higher.

More specifically, iron ore miners are reportedly struggling to keep up with demand aimed at steel production, which has been ramping up, particularly in China. Iron ore prices have reached record highs this week.

Lithium and nickel, meanwhile, are some of the metals riding the growth in development of and demand for electric vehicles. They are both important components in batteries, and nickel is also widely used in stainless steel manufacture. These are all segments facing rising output demand.

Copper, too, has seen massive gains, hitting record prices on the economic recovery story. The metal is also buoyed by its ties to the environmental, social and governance (ESG) theme. Back in April, Goldman Sachs estimated long-term supply/demand gap for copper at a level “twice the size of the gap that triggered the bull market in copper in the early 2000s," according to Markets Insider.

Why? Because copper—a metal integral to clean energy infrastructure—is a key component in the efforts to lower carbon footprints. Planned government spending in this segment has been another shot in the arm for copper prices, which have delivered quite the ride in recent weeks.

The United States Copper Index Fund (CPER), a futures-based fund, is trading at record highs since inception, up about 33.5% so far in 2021. One-year gains are nearing 90%.

 

 

Broad Plays Capturing Flows

About a third of commodity ETFs on the market are broad commodity portfolios, offering investors access to several commodities under one ticker. These funds have found a strong following this year. 

Among these strategies, none has picked up more assets than the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) this year. PDBC, which invests in about 14 different commodities, has seen some $1.6 billion in net creations in 2021.

PDBC is one of a few that offer “no K-1” access to commodity returns. The fund is nearly identical to its sibling, the Invesco DB Commodity Index Tracking Fund (DBC), which tracks an index of 14 commodities through a basket of futures contracts selected to minimize the impact of roll yield on returns. (DBC has picked up $755 million in net new assets this year.)

The key difference is that PDBC is structured as a ’40 Act fund (and is actively managed), as opposed to DBC’s index-based commodity pool setup. Different structures mean different diversification rules and tax treatments. PDBC doesn’t issue K-1’s whereas DBC does, but DBC has freer range when it comes to diversification.

PDBC is a similar approach to that of the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB), which invests in 24 commodities in an open-ended fund wrapper. The First Trust Global Tactical Commodity Strategy Fund (FTGC) is another one, which has picked up nearly $850 million in net new assets in 2021. The iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT) is also on this list.

These strategies have all delivered solid two-digit gains in the past year, as seen below. As a group, broad commodity ETFs have attracted more than $4 billion in net creations since the beginning of the year, remaining a popular offering with investors.

 

Charts courtesy of StockCharts.com

 

Finding The Right Commodity Fit

Investing in commodities through ETFs can take many forms, from single-market to multicommodity portfolios. The choice also comes down to structure, including commodity pool strategies, open-ended funds and exchange-traded notes.

Here’s where we can help. Your research can begin with a list of available funds in our Commodity ETF channel, where each ETF listed links to a complete fund description and portfolio details. You can also rely on our education library for clarification on how different commodity ETFs are taxed, and on key drivers of commodity returns.

From there, you can use additional tools such as our ETF Comparison Tool, which allows you to compare two ETFs side-by-side, and our ETF Fund Flows Tool, to see money flows—a good gauge of investor sentiment.

These tools can help with your ETF due diligence. Regarding views on the commodity investment opportunity, you have to bring your own.

 

Contact Cinthia Murphy at c[email protected]

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