A new analysis suggests ETFs with commodities exposure have been doing better than equities and bonds
The financial seas have been looking choppy lately, and that has taken bond and equity investors on a disappointing ride. But the story is better when looking at commodities, which had been shunned and ignored for years.
“As poorly as commodities have done in recent years, so far in 2018, they’re doing quite well, and some analysts believe their outperformance can continue,” said Sumit Roy, ETF analyst and contributor to ETF.com.
Looking generally at broad-commodity ETFs, Roy found that more than half of the funds have posted modest gains (“only a per cent or two”) so far in 2018. But that was better than equities’ 0.1% loss over the first quarter, as well as the 1.8% decline in bonds.
“In general, ETFs that track the S&P GSCI, which is a global production-weighted index that’s heavy on energy, are doing the best this year,” Roy said, noting tailwinds from a strong 7.5% rally in WTI oil and a 12.2% jump in US gasoline prices. “Meanwhile, the ETFs that track the Bloomberg Commodity Index aren’t doing as well this year due to their heavier weightings in metals, a sour spot in this year’s commodities market.”
He also noted generally solid performance from agricultural commodities. Corn, soybeans, and wheat have gained more than 5%, while cocoa has rallied spectacularly by 35%.
“We typically see commodities outperform stocks and other risk assets in the late stages of a business cycle,” Maxwell Gold, director of investment strategy and research at ETF Securities, told ETF.com. “Right when we're beginning to see capacity overshoot and we hit a slowdown in equity markets, commodities perform better.”
Gold also noted a broad shift into backwardation, which boosts returns for commodity investments. That suggests ETFs with broad commodity exposure could see better times ahead.
But according to Roy, more aggressive investors that are willing to concentrate on specific sectors may want to consider focusing on the oil sector. “Goldman Sachs analysts forecast that Brent crude oil prices could hit US$82.50 within six months, well above current levels of US$68, due to much-faster-than-expected demand growth and a tight supply picture,” he said.”
He also pointed to International Energy Agency (IEA) projections that expect oil inventory declines in the second, third, and fourth quarters, particularly as supply from Venezuela remains “clearly vulnerable to an accelerated decline”.