Commodities are having their moment. Gold and copper have hit historic highs while agriculture is knocking on the door to join the party—investors can still be part of the fun.
Many metals have seen a big surge in price this year, a reflection of higher demand and tighter supply. Silver is around its highest value in over a decade while copper hit a record price of $5 a pound on Tuesday. Gold has already marked 22 record highs this year.
Aluminum and iron ore have started to break through; the former is at a two-year high, the latter is at its three-month high.
In the agricultural market, inventories are tight for wheat due to production declines in Russia, the world’s largest exporter. The grain settled at its highest price in about a year on Tuesday. Soybean and corn prices have come under pressure, but analysts are watching for a spate of bad weather across the Midwest that can raise prices again.
Bottom line, the commodity bull market “is alive and well and has more upside,” says the chief investment officer at Bleakley Financial Group, Peter Boockvar, who likes and owns fertilizer stocks.
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Financial wisdom counsels retail investors to stick to the classic 60/40 portfolio of stocks and bonds. Commodities are a speculative asset classes; one day you make a fistful, the other day you are down in the dumps. They are almost entirely at the mercy of supply and demand.
But it’s reasonable to sprinkle—5% to 10%—of the wonky stuff into your portfolio, especially at a time when price gains look relentless and uncertainty on inflation looms. Commodities offer a hedge against currencies, equity and bond investments, which can erode in value when inflation rises unexpectedly.
Investors can use exchange-traded funds to invest into the hardgoods. It’s a more convenient way to invest in the asset class versus futures, which are agreements to buy or sell a commodity at a future date for a fixed price. Futures, typically used by sophisticated investors and food manufacturers, also add significant risk to your portfolio.
Broad commodity ETFs, on the other hand, offer the desired diversification without the complexity—but choose carefully. ETFs can abruptly close if there’s lack of investor interest or poor returns. Five funds stand out when Barron’s screens for broad basket commodity ETFs on Morningstar Direct with five years worth of trading history, at least $200 million in assets—the minimum we deem safe—and low costs.
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First was the $5.3 billion Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF. One fifth of its holdings are in energy like oil and gasoline, 19% is in Treasuries and a much smaller portion is in agriculture and metals. Many thematic ETFs allocate to cash and Treasuries to lower risk, ensure liquidity and generate income.
Invesco’s ETF has returned 4.2% over the past year through the end of April. While that’s piddly compared with the S&P 500’s 21% gain, it’s achieving those gains while hedging against a potential downfall in stocks. (In 2022, it gained as much as the S&P 500 fell.) The ETF charges 0.51% as annual fees; the ratio is important because it can eat into investor returns, particularly over the long run.
Bloomberg All Commodity Strategy K-1 Free ETF
charges just 0.26% in fees. It’s a passive ETF meaning it tracks an underlying index rather than allowing managers to make investing decisions. The ETF is a good option for investors looking for equal exposure to energy and agriculture; each makes up 29% of the portfolio, and the rest is mostly in metals.
The best performer over the past five years through month end April among the funds was the
abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free
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returning 10.3%. The two abrdn ETFs hold similar commodities but the latter focuses more on longer-dated commodity futures contracts.
Contracts that expire further out in the future potentially lower the costs associated with rolling near-term futures contracts frequently. They tend to be less volatile but diverge more from the spot or current prices.
Investors tempted to bet on ETFs that hold single commodities can look at
the largest ETF in the precious metal category. To bet on Silver,
is the most actively tool used based on average five-year monthly flow. Within agriculture,
and
Amplify Alternative Harvest ETF
are the only two funds with considerable assets under management.
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These ETFs can be used to manage certain scenario risks, writes Jared Woodard, strategist at BofA Global Research. An investment in energy funds, for example, was a great move to hedge geopolitics in 2022 when Russia attacked Ukraine.
But the investment can be extremely volatile at times, Woodard adds. These ETFs can also plummet if supply eventually catches up with demand for the particular commodity. Remember the narrower the niche, more the trouble.
The gains in commodities fuel the conversation on sticky inflation and exacerbate concerns for the Federal Reserve committee considering interest-rate cuts this year. Investors can still benefit.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com.
