Commodities Are On A Roll, Playing The Upside Through PDBC

Cocoa prices have gone to the moon. The soft agricultural commodity is now more expensive than copper ($10,000 per metric ton for the former and $8,700 per metric ton for the latter). Unfortunately for investors holding the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ:PDBC), there is no ‘brown gold’ in that ETF or the Invesco DB Commodity Index Tracking Fund ETF (DBC). Big picture, the S&P GSCI Commodity Index is up more than 8% in 2024.

I am upgrading PDBC from a hold to a buy based on bullish price action and improved global GDP outlooks for this year.

2024 Global GDP Growth Expectations on the Rise

According to the issuer, PDBC is an actively managed fund that seeks to achieve its investment objective by investing in commodity-linked futures and other financial instruments that provide economic exposure to a diverse group of the world’s most heavily traded commodities. The index PDBC tracks are composed of futures contracts on 14 heavily traded commodities across the energy, precious metals, industrial metals, and agriculture sectors.

PDBC is actually much larger than DBC. Total assets under management sum to $4.7 billion as of March 26, 2024. While its share price momentum is weak at a C- ETF grade by Seeking Alpha, that’s much improved from a sour D grade just three months ago. A strong rally in WTI and Brent so far this year has been a boon. PDBC’s annual expense ratio is moderate at 0.59%, but considering the trading mechanics it must undertake each month as it rolls out exposure to later-dated commodity futures contracts, the fee is reasonable.

The fund pays a high 4.1% forward yield, though it is considered risky when analyzing historical volatility trends. The ETF’s liquidity score is strong, and volume is high (more than 3.6 million shares traded daily, on average) but Invesco notes that the fund’s 30-day median bid/ask spread is 7 basis points, so I encourage investors to use limit order when trading the product.

Of course, whenever we are discussing commodities, paying attention to movements in the US Dollar Index (DXY) is required homework. Right now, the greenback is in a holding pattern, in my technical eye. The 105 mark is resistance while an area just under 102 has been supporting.

Fundamentally, Fed Chair Powell reiterated that the FOMC sees the likelihood of rate cuts starting in the not-too-distant future, perhaps as early as June. If that comes to fruition, then it’s possible that the dollar could retreat, which would be a boon for commodities. It is a nuanced set of macro circumstances, however, since a strong economy could support the dollar. Overall, I see the prospect of resilient GDP growth and impending rate cuts as a broad tailwind to commodities.

Dollar Watch: A Stable USD is Neutral for Commodities

As of the end of February, PDBC had high exposure to energy commodities – not surprising considering the hot start to the year for oil & gasoline (natural gas, not so much). Versus my previous analysis of the ETF, the portfolio is about six percentage points more allocated to Brent, WTI, RBOB, and NY Harbor ULSD.

The hottest area of the commodity world is the ag space, but PDBC holds a relatively low allocation in those soft commodities. Finally, gold is near all-time highs as we approach the end of Q1, but the yellow metal is just 8.6% of PDBC.

PDBC: High Energy Exposure, Light on Agriculture

Seasonally, PDBC tends to rally from April through June. Indeed, the second quarter has historically been the ETF’s best stretch, so that is yet another tailwind to weigh as all investors rethink their over- and under-weights amid a shifting macroeconomic landscape.

PDBC: Bullish Seasonal Trends in Q2

The Technical Take

PDBC paid out two large distributions. One at the end of 2021 and another in December 2022. Hence, I still like to look at the chart of DBC when performing technical analysis on this area.

What’s nice from a technician’s perspective, though, is that PDBC’s year-end payout wasn’t all that much last year, so PDBC and DBC have similar recent charts. Notice in the graph below that DBC has significantly improved RSI momentum in the last handful of months. While price threatened to break down below its Q2 2023 lows, the bears were unable to sustain the downside. So, there are bullish implications here.

I see key resistance near the $24 mark on DBC, so that may dictate price action on PDBC. $14 is the key price to monitor for PDBC. If DBC can climb above its flattening 200-day moving average, then that would auger well for intermediate- or long-term upside. $25.60 is the next possible selling spot, which corresponds to $15.35 on the PDBC daily chart.

Overall, with rising momentum (which is said to lead price action), DBC’s technical situation has support building ahead of what is often a bullish seasonal stretch.

DBC: Strengthening RSI Momentum As Price Stabilizes

The Bottom Line

I am upgrading PDBC from a hold to a buy. The macro backdrop appears favorable for commodities while price action and seasonal trends are also bullish considerations.