Commodity ETFs Navigate Choppy Seas

April 17, 2018

Additionally, many commodities are moving into backwardation—where front-month contracts are higher than subsequent contracts—which boosts returns for commodity investments, he notes.

“Even if we don't see outsized price increases in commodities, from a total return perspective, commodity returns will benefit from a change to positive roll yields based on the reshaping and structuring of the fundamental market in commodities,” Maxwell added.

 

Commodity Q1 Performance (%)
Cocoa 35.1
Gasoline 12.2
Corn 10.5
Soybeans 9.8
WTI Crude Oil 7.5
Wheat 5.6
Tin 5.3
Brent Crude Oil 5.1
Nickel 4.3
Cotton 3.6
Gold 1.7
Platinum 0.13
Zinc -1.6
Heating Oil -2.3
Silver -3.4
Lead -3.4
Coffee -6.4
Natural Gas -7.5
Live Cattle -7.5
Copper -8.3
Palladium -10.5
Aluminum -11.9
Sugar -18.6
Lean Hogs -20.2

 

More Upside For Oil

For investors simply looking to invest in commodities broadly—either to bolster portfolio returns or diversify—there’s about a dozen ETFs that provide that exposure, including the PowerShares DB Commodity Index Tracking Fund (DBC), the iShares S&P GSCI Commodity Indexed Trust (GSG) and the United States Commodity Index Fund (USCI), to name a few.

But for more aggressive investors, picking and choosing individual commodities or commodity sectors is always an option.

Oil is one commodity that’s done well this year and could keep climbing in the months to come. Goldman Sachs analysts forecast that Brent crude oil prices could hit $82.50 within six months, well above current levels of $68, due to much-faster-than-expected demand growth and a tight supply picture.

According to the International Energy Agency, oil inventories are expected to decline in the second, third and fourth quarters of the year.

“With supply from Venezuela clearly vulnerable to an accelerated decline, without any compensatory change from other producers, it is possible the Latin American country could be the final element that tips the market decisively into deficit,” said the IEA.

Futures-tracking ETFs like the United States Brent Oil Fund LP (BNO) should do well if the bullish scenario for oil plays out.

Tail Winds For Metals

Of the main commodity sectors, metals have fared the worst this year after a strong run in 2017. But the sector may just be taking a breather before resuming its rally, according to ETF Securities’ Gold.

In his view, copper and precious metals such as gold, silver and platinum are ripe for the picking.

Copper “has a continued tail wind behind it given the global growth of emerging markets and developed markets, the potential for increased investment in infrastructure, as well as a reduction of mining and capex on the supply side,” he said, while adding that precious metals could outperform on the back of geopolitical and financial market volatility.

The United States Copper Index Fund (CPER), the SPDR Gold Trust (GLD), the iShares Silver Trust (SLV) and the ETFS Physical Platinum Shares (PPLT) are a few of the ETFs targeting those commodities.

Ag: Mixed Bag

On the agriculture side of things, analysts see the potential for big moves in either direction, but with an upside bias. Corn and soybeans plantings are expected to be down this year from last, according to the U.S. Department of Agriculture.

A report by Reuters analyst Karen Braun suggested U.S. corn stockpiles in 2019 could easily hit a five-year low if plantings are reduced and if there’s a late start to the season amid adverse weather in the corn belt.

On the flip side, weighing on the complex more recently was news that China could slap tariffs on U.S. exports of soybeans in retaliation for potential tariffs the U.S. announced against Chinese products.

If the tariffs go through, they would mean "surplus soybeans, and lower soybean prices in the U.S.," Tobin Gorey, director of agricultural strategy at Commonwealth Bank of Australia, told Reuters.

Another commodity for which lower prices could make an appearance is cocoa. Prices for the bean are up the most of any commodity so far in 2018, but a lot of that is simply because they went too low last year, reaching a 10-year trough.

"We’ve seen cocoa prices strengthen,” Edward George, head of group research at Ecobank Transnational, told Bloomberg. “The fact is they can easily go back down again."

Contact Sumit Roy at [email protected]

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