5 ETFs At The Heart Of The Commodity Comeback This Year

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After 10 years of underperformance, commodities are seeing a huge boom with several of them hitting new all-time highs buoyed by optimism over economic growth, reflation trade, rising consumer confidence, and higher housing price. The massive liquidity injections by central banks across the globe have been among the major catalysts.

A weaker greenback also added to the strength as it makes dollar-denominated assets attractive for foreign investors, raising the appeal for commodities. This is because commodities are often viewed as a hedge against inflation and a weaker dollar.

Notably, the Bloomberg Commodity Spot Index, which tracks price movements for 23 raw materials, is hovering at levels not seen since 2012. Invesco DB Commodity Index Tracking Fund (DBC - Free Report), which tracks a broad basket of the 14 most heavily traded commodity futures contracts, has risen 25.1% in the year-to-date time frame compared to gains of 11.5% for the broad market fund (SPY - Free Report).

Prices for a wide range of commodities from copper to oil to timber have been skyrocketing as the world’s largest economies recover from the pandemic. With COVID-19 vaccines now reaching millions of Americans, demand for these raw materials is surging amid limited supplies, production issues, and poor weather. The demand for air travel and cars has been surging as restrictions have been eased and the economy has reopened. Manufacturing and industrial activities are also picking up.

In addition, improving conditions in China, the world’s largest consumer of raw materials, has been driving commodity prices higher. The world’s second-biggest economy saw a record 18.3% growth in the first quarter of 2021. This represents the biggest jump in GDP since China started keeping quarterly records in 1992. China is buying a record amount of soybeans, as well as grains like corn and wheat.

According to data compiled by Bloomberg, hedge funds have increased bullish bets in commodity futures for three consecutive weeks. Goldman Sachs (GS - Free Report) expects commodities to rally another 13.5% over the next six months.

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