Since the beginning of the year, the major market indexes have witnessed massive volatility on concerns over aggressive interest rate hikes by the Federal Reserve to tame the multi-decade high inflation, supply disruptions arising out of the continuing Ukraine-Russia war, rising energy and commodity prices, and the possibility of a recession.
The U.S. consumer price index moderated to 8.3% in April after advancing 8.5% in March, the highest level in 40 years. Economists believe the May CPI will remain flat. The May jobs report released last week indicated that the U.S. economy had added 390,000 jobs, higher than analyst expectations of 320,000. This significantly eliminates the possibility of a pause in aggressive monetary tightening by the Federal Reserve, leading to further correction in equities.
Goldman Sachs believes investors can hedge against these macroeconomic headwinds by investing in commodities. GS’ Head of Commodities Research Jeffrey Currie said, “As central bankers can drain liquidity faster than the economy can generate new production capacity, financial assets will continue to underperform physical assets like commodities.”
This is why today I’m going to analyze three prominent 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 (DBC).
Here’s Why the Bull Run may Continue for Commodities
Commodities are goods that are more or less uniform in quality and utility regardless of their source. These are produced or extracted products, often natural resources or agricultural goods, used as inputs into other processes.
Commodities can be divided into the following categories: hard and soft. Hard commodities include metals such as gold, copper, aluminum, and nickel, and energy products such as natural gas, crude oil, and unleaded gasoline. In contrast, soft commodities include corn, wheat, and soybeans.
Commodities have a low or negative correlation to other asset classes. Given the Fed’s aggressive monetary tightening to fight inflation, equities and other asset classes are expected to remain under pressure. Analysts believe that commodities may stand out in these uncertain market conditions.
Amid significant headwinds, such as disruption of supply chains, rising costs, and a slowdown in manufacturing, governments and manufacturers have been hoarding essential commodities for their functioning. “Commodity markets are experiencing one of the largest supply shocks in decades because of the war in Ukraine,” said World Bank’s Prospects Group Director Ayhan Kose.
According to Goldman Sachs, “With inventories and spare capacity still low across energy and agricultural markets, any small shock to supply will continue to have outsize impacts on prices. As we have often shown before, commodities are the only consistent hedge for unexpected inflation, usually as the source of it in the economy.”
Fears of commodity shortage in the future might lead to the hoarding of commodities, which might keep fueling prices. According to the World Bank’s Commodity Markets Outlook report, energy prices are expected to rise more than 50% in 2022, while the prices of non-energy commodities such as agriculture and metals are expected to increase nearly 20% in 2022. Overall, commodity prices are expected to remain above the five-year average.
3 ETFs to Buy if you are Bullish on Commodities
Invesco Optimum Yield Diversified Commodity Strategy No 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 futures contracts on commodities, commodity-linked notes and on commodity indices, exchange-traded options on commodities futures, swaps on commodities, and commodity-related forward contracts to create its portfolio. It invests in energy, precious metals, industrial metals, and agriculture commodities. The fund benchmarks the performance of its portfolio against the DBIQ Optimum Yield Diversified Commodity Index Excess Return Index and the DBIQ Optimum Yield Diversified Commodity Index Total Return.
PDBC has $9.83 billion in assets-under-management (AUM). Its major holdings include the U.S. dollar, with a 31.20% weighting in the fund, followed by Mutual Fund (OTHER) at 28.14%, and United States Treasury Bills 0.0% 25-NOV-2022 at 25.46%. It currently has 10 holdings in total.
The ETF has seen net inflows of $712.20 million over the past three months. Its 0.62% expense ratio compares to the 0.76% category average. PDBC has gained 46.9% year-to-date to close the last trading session at $20.66.
PDBC’s POWR Ratings reflect this promising outlook. The ETF has an overall rating of A, which equates to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
PDBC has an A for Trade, Buy & Hold, and Peer grade. Of the 117 ETFs in the A-rated Commodity ETFs group, PDBC is ranked first. Get all the PDBC ratings here.
First Trust Global Tactical Commodity Strategy Fund (FTGC)
FTGC is an exchange-traded fund launched and managed by First Trust Advisors L.P. The fund invests in the commodity markets of countries across the global region. It invests through derivatives such as futures contracts in commodities. 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 AUM. Its major holding includes the U.S. Dollar, which has a 46.85% weighting in the fund, followed by Mutual Fund (Other) with a 21.43% weighting, and the Morgan Stanley Institutional Liquidity Funds Treasury Portfolio Institutional with an 8.22% weighting.
FTGC has seen 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 equates to Strong Buy in our proprietary POWR Ratings system. FTGC has an A for Trade grade, Buy & Hold grade, and a B for Peer grade. It is ranked #4 in the same group. To see more of FTGC’s POWR Ratings, click here.
Invesco DB Commodity Index Tracking Fund (DBC)
DBC is an exchange-traded fund launched by Invesco Ltd. Invesco PowerShares Capital Management LLC manages the fund. It invests in the commodity markets. The fund uses futures contracts to invest in commodities like Light Sweet Crude Oil (WTI), Heating Oil, RBOB Gasoline, Natural Gas, Brent Crude, Gold, Silver, Aluminum, Zinc, Copper Grade A, Corn, Wheat, Soybeans, and Sugar. It seeks to replicate the performance of the DBIQ Optimum Yield Diversified Commodity Index Excess Return.
With $4.95 billion AUM, DBC’s top holding is the U.S. dollar which has a 76.65% weighting in the fund, followed by the United States Treasury Bills 0.0% 20-OCT-2022 with a weighting of 6.28%, and the Invesco Treasury Collateral ETF with a 4.06% weighting.
DBC has seen 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 solid prospects. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. In addition, DBC has an A for Trade grade, Buy & Hold grade, and Peer grade. Again, it is ranked #3 in the Commodity ETFs group. Get all the DBC ratings here.
PDBC shares . Year-to-date, PDBC has gained 47.16%, versus a -15.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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