3 Reasons Why Commodities ETFs May Rally In 2021

The demand woes led by the coronavirus outbreak and the oil market meltdown hurt the commodity market initially in 2020. However, broad commodities bounced back strongly recently on massive liquidity injections by central banks across the globe and optimism over the vaccines.

Commodity investors wager that crops, metals and oil will move northward this year, prompting combined bets on prices rising to the highest in at least a decade, per a Bloomberg article. In such a scenario, let’s find out which factors would favor the commodity market in 2021.

Soft U.S. Dollar is a Plus

The Fed has pledged to hold rates near zero and will continue the asset purchase program at the current rate until “substantial further progress” has been made toward reaching maximum employment and healthy inflation. With several economic data including that of the labor market coming in downbeat of late, the Fed is likely to stay put this year.

Chicago Fed President Charles Evans recently said, it’s “probably going to be 2024 before we see interest rates start to rise,” per an article. Such a Fed move should keep the greenback subdued this year and boost the prices of commodities that are dominatedby the currency (read: Dollar Declines: What Awaits the Currency ETFs in 2021?).

Fiscal Stimulus

Since coronavirus worries are prevalent, major economies are still rolling out stimulus. In late December, Democratic and Republican leaders clinched an agreement on a new coronavirus relief deal worth around $900 billion that comprises a second round of stimulus checks and further unemployment benefits. However, with Democrats taking control over Senate now, the markets are betting big on a fatter stimulus. This means more consumption and faster economic growth as well as higher demand for commodities.

Moreover, president-elect Biden’s push for tax incentives will encourage domestic manufacturing. Biden’s campaign aimed to invest in restoring highways, roads and bridges, changing water pipes, building out rural broadband access, and updating schools among other works. Infrastructure fund should thus get a boost. If this happens, demand for materials should go up (read: 5 ETFs to Buy For the Blue Wave).

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