ETFs For A "Long Commodities Trade"

Of the major asset classes (stocks/bonds/commodities), commodities are the most highly correlated to inflation, and commodity ETFs have traded very well during periods of rising inflation.

There’s ample evidence that inflation pressures are rising, so much so that the current macroeconomic debate surrounding inflation isn’t if we’re seeing a material acceleration in inflation (we are), but instead whether it’s a temporary phenomenon caused by supply chain disruptions (which the Fed maintains) or whether it’s something more structural (the return of higher inflation for the first time in nearly 40 years).

Whether the Fed is right (inflation is temporary) or the inflation hawks are right (inflation is not temporary) will be determined in the next several months.

In the meantime, we believe the argument is balanced enough that everyone should ensure they have an “inflation playbook” ready to deploy if “temporary” inflation becomes something stickier.

But allocating to commodities as an asset class can be tricky depending on your age, net worth, risk profile, etc., so what level of commodity allocation that’s reasonable will differ between individuals.

But I did want to provide two suggestions for commodity ETFs, as well as identify more tactical specialized commodity ETFs, so you have a resource you can refer back to if and when you decide to add commodities to portfolios as direct inflation hedges.

First, when selecting a commodity ETF, the three criteria I focus on are 1) Exposure, 2) Liquidity, and 3) Does is have a K-1 (and is the K-1 worth the aggravation for the exposure)?

Criteria 1: Exposure

Not all commodity ETFs have the same exposure, and the differences can significantly alter returns. Broadly, there are three areas of exposure: Energy commodities, metals and agricultural commodities. The returns on those ETFs will depend on which commodities are outperforming.

For instance, over the past few weeks, agricultural commodities (corn, soybeans, wheat) have exploded higher, so commodity ETFs that have larger “Ag” allocations will have outperformed. Similarly, base metals (steel, copper) also have rallied hard, again favoring those ETFs with more exposure to those sectors.

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