Since the start of the year, major equity indices have seen massive volatility amid concerns over aggressive interest rate hikes by the Federal Reserve to rein in decades-high inflation, disruptions in the supply resulting from the continuing war between Ukraine and Russia, rising energy and commodity prices and the possibility of a recession.
The US consumer price index slowed to 8.3% in April after rising 8.5% in March, its highest level in 40 years. Economists believe May’s CPI will remain stable. The May jobs report released last week said the U.S. economy added 390,000 jobshigher than analysts’ expectations of 320,000. This significantly eliminates the possibility of a pause in the Federal Reserve’s aggressive monetary tightening, leading to another correction in equities.
Goldman Sachs believes investors can hedge against these macroeconomic headwinds by investing in commodities. Jeffrey Currie, Head of Commodities Research at GS, said: “As central bankers can drain liquidity faster than the economy can generate new productive capacity, financial assets will continue to underperform physical assets such as raw materials”.
That’s why today I’m going to analyze three leading commodities ETFs, Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), First Trust Global Tactical Commodity Strategy Fund (FTGC) and Invesco DB Commodity Index Tracking Fund (CBD).
Here’s why the bull run could go on for commodities
Commodities are goods that are more or less uniform in quality and usefulness, regardless of their source. These are manufactured or extracted products, often natural resources or agricultural goods, used as inputs in other processes.
Raw materials can be divided into the following categories: hard and soft. Hard commodities include metals such as gold, copper, aluminum and nickel, as well as energy products such as natural gas, crude oil and unleaded gasoline. In contrast, commodities include corn, wheat, and soybeans.
Commodities have a low or negative correlation with other asset classes. Given the Fed’s aggressive monetary tightening to fight inflation, equities and other asset classes are likely to remain under pressure. Analysts believe that commodities could stand out in these uncertain market conditions.
Amid significant headwinds, such as disrupted supply chains, rising costs and slowing manufacturing, governments and manufacturers have hoarded commodities critical to their operations. “Commodity markets are experiencing one of the biggest supply shocks in decades due to the war in Ukraine,” said World Bank Outlook Group Director Ayhan Kose.
According to Goldman Sachs, “With inventories and spare capacity still low in the energy and agricultural markets, any small shock to supply will continue to have outsized impacts on prices. As we have often shown before, commodities are the only consistent hedge against unexpected inflation, usually as the source of it in the economy.
Fears of a shortage of raw materials in the future could lead to hoarding of raw materials, which could continue to fuel prices. According to the World Bank’s Commodity Markets Outlook report, energy prices are expected to increase by more than 50% in 2022, while the prices of non-energy commodities such as agriculture and metals are expected to increase by almost 20%. % in 2022. Overall, commodity prices are expected to stay above the five-year average.
3 ETFs to buy if you’re bullish on commodities
Invesco Optimum Yield Diversified Commodity Strategy Non K-1 ETF (PDBC)
PDBC is an exchange-traded fund launched and managed by Invesco Capital Management, LLC. The fund invests directly through derivatives and other funds in commodities. It invests in derivatives such as commodity futures, commodity-linked notes and commodity indices, exchange-traded options on commodity futures, commodity swaps and commodity-linked futures contracts to build its portfolio. It invests in energy, precious metals, industrial metals and agricultural commodities. The fund compares the performance of its portfolio to the DBIQ Optimum Yield Diversified Commodity Index Excess Return Index and the DBIQ Optimum Yield Diversified Commodity Index Total Return Index.
PDBC has $9.83 billion in assets under management (AUM). Its top holdings include the US dollar, with a weighting of 31.20% in the fund, followed by mutual funds (OTHER) at 28.14% and US Treasury bills at 0.0% 25- NOV-2022 at 25.46%. He currently has 10 participations in total.
The ETF recorded net inflows of $712.20 million over the past three months. Its expense ratio of 0.62% compares to the category average of 0.76%. PDBC has gained 46.9% year-to-date to close the last trading session at $20.66.
PDBC POWR Rankings reflect this promising prospect. The ETF has an overall rating of A, which is equivalent to Strong Buy in our proprietary rating system. POWR ratings are calculated by considering 118 separate factors, with each factor weighted to an optimal degree.
PDBC has an A for Trade, Buy & Hold and Peer grade. Of the 117 A-rated ETFs Commodity ETFs group, PDBC is ranked first. Get all PDBC ratings here.
First Trust Global Tactical Commodity Strategy Fund (FTGC)
FTGC is an exchange-traded fund launched and managed by First Trust Advisors LP. The fund invests in the commodity markets of countries in the global region. It invests through derivatives such as commodity futures. The fund seeks to benchmark the performance of its portfolio against the Bloomberg Commodity Index, the S&P GSCI Total Return Index and the S&P 500 Index.
FTGC has $5.19 billion in AT M. Its largest holding includes the US dollar, which has a weighting of 46.85% in the fund, followed by mutual funds (other) with a weighting of 21.43%, and the Morgan Stanley Institutional Liquidity Funds Treasury Portfolio Institutional with a weighting of 8.22%.
FTGC recorded net inflows of $2.39 billion over the past six months. FTGC has gained 30.5% year-to-date to close the last trading session at $30.10.
It’s no surprise that FTGC has an overall A rating, which equals Strong Buy in our proprietary POWR rating system. FTGC has an A rating for Trade, a Buy & Hold rating and a B rating for Peer. It is ranked #4 in the same group. To learn more about FTGC’s POWR ratings, Click here.
Invesco DB Commodity Index Tracking Fund (CBD)
DBC is an exchange-traded fund launched by Invesco Ltd. Invesco PowerShares Capital Management LLC manages the fund. It invests in commodity markets. The fund uses futures contracts to invest in commodities such as light sweet crude oil (WTI), fuel oil, RBOB gasoline, natural gas, Brent, gold, silver, aluminum, zinc, grade A copper, corn, wheat, soy and sugar. . It aims to replicate the performance of the DBIQ Optimum Yield Diversified Commodity Index Excess Return index.
With $4.95 billion in assets under management, DBC’s top holding is the US dollar, which has a weighting of 76.65% in the fund, followed by US Treasury bills at 0.0% 20-OCT-2022 with a weighting of 6.28%, and the Invesco Treasury Collateral ETF with a weighting of 4.06%.
DBC recorded net inflows of $935.37 million over the past six months. DBC has gained 58.3% over the past nine months to close the last trading session at $30.48.
DBC’s POWR ratings reflect a strong outlook. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. Additionally, DBC has an A rating for Trade, a Buy & Hold rating, and a Peer rating. Again, it is ranked #3 in the commodity ETF group. Get all DBC odds here.
PDBC Actions. Year-to-date, the PDBC has gained 47.16%, compared to a -15.22% rise in the benchmark S&P 500 over the same period.
About the Author: Dipanjan Banchur
Ever since he was in elementary school, Dipanjan had been interested in the stock market. This enabled him to obtain a master’s degree in finance and accounting. Currently, as an investment analyst and financial journalist, Dipanjan is particularly interested in reading and analyzing emerging trends in financial markets. After…