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Commodity ETFs : Look Before Leaping
These funds are not all the same . By Ron DeLegge
KNOWING WHAT ’ S IN AN EXCHANGEtraded fund is usually as easy as clicking a button , since the funds are transparent about their daily holdings . But understanding the fund ’ s investment strategy is an entirely different ball game .
That ’ s especially true with commodity ETFs , which come in a variety of packages , each one unique .
With inflation stubbornly elevated and U . S . interest rates likely to remain stubbornly high , commodities have delivered impressive returns this year , beating bonds and real estate . “ Broad commodities , more than any single commodity , have a high correlation to inflation . Historically they ’ ve been a great inflation hedge ,” says John Love , the CEO at USCF Investments . “ You saw what you ’ d expect in this last inflation cycle with broad commodities rising hand-in-hand with inflation as it went up .”
So with commodities up , the ETFs that cover them have gotten a natural boost as well , and investors ’ interest in them is on the upswing . In fact , the top 20 commodity funds by assets under management vacuumed in almost $ 1 billion in April alone , according to Bloomberg Intelligence ( together these funds oversee around $ 20 billion ).
Among the oldest and largest of the diversified commodity ETFs is the Invesco DB Commodity Index Tracking Fund ( DBC ). Launched in 2006 , it has almost $ 1.8 billion in assets , and it ’ s linked to the DBIQ Optimum Yield Diversified Commodity Index . It tracks 14 commodities , though it ’ s tilted heavily to energy — almost 55 % of it goes to things like crude oil , gasoline and natural gas . Agriculture and metals make up the rest . The fund ’ s annual expense ratio is 0.87 %.
The iShares S & P GSCI Commodity-Indexed Trust ( GSG ) also debuted in 2006 . This fund tracks the S & P GSCI , a world production-weighted commodity index on 24 futures contracts of physical commodities across five sectors : energy , industrial metals , precious metals , agriculture and livestock .
Every November the index provider indicates the commodity weightings for the upcoming year . And for 2024 , the iShares fund ’ s index is roughly 61 % energy and 18 % agriculture while the remainder is in livestock , industrial commodities and precious metals . The GSG fund ’ s annual expense ratio is 0.75 %.
Things Get Missed
The weakness of these two index-based funds is that they are rebalanced annually , which means they can miss certain commodities altogether or find themselves overweight in the wrong ones . They offer little flexibility for swift adjustments , which can make all the difference in fast-moving commodities markets .
Take cocoa . It ’ s been setting record highs , but it ’ s missing
38 | FINANCIAL ADVISOR MAGAZINE | JUNE 2024 WWW . FA-MAG . COM