“The cheapest time to buy insurance is when you don’t need it.”
With inflation surging globally, commodities and their impact on the globe have been brought into the spotlight by the onset of Russia’s invasion into Ukraine. Consumers are seeing these impacts daily, as are many companies with their profits being impacted by higher input costs for the foreseeable future.
From an investment perspective, while we cannot plan for each tail event, we can certainly construct portfolios that build in natural airbags via proper diversification that can help buffer against these shocks. Commodities are one of those assets and are broken down into four basic sub asset classes: Metals, Energy, Livestock and Meat, and Agriculture.
Prior to the Ukraine/Russia engagement, commodities, similar to the regular business cycle, were experiencing a V-shaped recovery due to the vaccine and fiscal stimulus driving the recovery.
However, unlike the business cycle where you can simply hire people or buy additional equipment, commodities were not prepared for this recovery. Much of this was in motion pre-pandemic.
As the greening of the globe has gained traction over the past decade, ESG investing has drawn capital away from the old economy and the production of “when you drop it on your foot it hurts,” has not kept up with rebounding demand. We have witnessed this as investment flows on an individual and institutional level have gone toward ESG related investment, and away from — even banning —non-ESG aligned investments.
The problem is, we still have to eat, drive, fly, build, feed, heat our homes, etc. These are all building blocks of the industrial world. We are now witnessing what occurs when you under-invest, the supply has not increased, yet you have demand that is constant, stimulated and increasing.…prices go up, we have diminished purchasing power in our wallets and corporate profits are exposed.
What is an investor to do?
In the never-ending quest to improve the risk and return characteristics of our portfolios, we are always searching for new assets that are not perfectly correlated with the assets that we already own.
When many investors construct an investment portfolio, the building blocks are often the “60/40” blend of stocks and bonds. For more than 10 years, low interest rates and central bank buying created a positive environment for both asset classes.
As all good things must come to an end, and central banks look to normalize their monetary involvement, asset classes will and have been reacting.
As of the end of Q1 2022, the S&P 500 was down -4.6%, the Barclays Aggregate Bond Index down -5.86%, with a blended return of -5% for the quarter. Concurrently, the S&P GSCI Commodity index was up 33% for the quarter, exhibiting the non-correlated nature of the asset class.
The benefits of adding commodities as part of portfolio construction boil down to:
- Inflation hedging, without the duration of fixed income
- Positive correlation with inflation
- Diversification away from equity and traditional business cycle risk
- Commodities have shown to improve expected risk-adjusted returns in a multi-asset portfolio
As with equities and fixed income, many avenues can be taken to gain exposure to commodities.
Ranging from physical ownership of a mine or farm, to investment vehicles such as passive indices and active approaches via ETFs and mutual funds.
Some benefits of a passive approach to commodities may include:
- Scalability and liquidity, a passive approach is not capacity constrained as some active approaches can be
- Costs, transaction, and exposure costs are minimal in order gain exposure to the underlying index/market
- Simple vehicle for a diversified basket of broad basket commodity exposure, specifically when the investor has macro point of view that encompasses a broad basket
While the benefits of an active approach may include:
- Passive index investors bear the burden of understanding how the actual index selection can impact their performance or intended exposure VS an active manager can make this part of their investment process. An example of this is the SP GSCI index has 50% in energy, while the Bloomberg Commodity index has 33% in energy.
- Take advantage of commodity specific characteristics as a source of alpha, such as backwardation and contango and use stops, short specific sub-sectors, and rebalance constantly
- Active approaches can express exposures based on macro-economic views. An example would be the last commodity cycle was driven by the build out of many developing countries such as China, requiring base metals VS the current environment where precious metals used for electric vehicle batteries will be sought.
In this article, we’re outlining the top 10 owners of Commodities ETFs. By the end of the article, you’ll have a better understanding of the landscape.
1. Morgan Stanley: $334,540,000
Investment strategies:
- First Trust Alt Abs Ret Strat ETF: $4,000
- WisdomTree Enhanced Commodity Stgy Fd: $1,715,000
- Janus Henderson Net Zero Trnstn Rscs ETF: $2,371,000
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $23,453,000
- First Trust Global Tactical Commodity Strategy Fund: $306,997,000
2. Wells Fargo: $248,811,000
Investment strategies:
- First Trust Alt Abs Ret Strat ETF: $0
- USCF SummerHaven Dyn CmdtyStgy NoK-1 ETF: $0
- GraniteShares Blmbrg CmdtyBrdStr NoK1ETF: $33,000
- WisdomTree Enhanced Commodity Stgy Fd: $714,000
- WisdomTree Enhanced Commodity Stgy Fd: $1,898,000
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $2,555,000
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $8,174,000
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $11,527,000
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $23,257,000
- First Trust Global Tactical Commodity Strategy Fund: $62,648,000
- First Trust Global Tactical Commodity Strategy Fund: $138,005,000
3. Alaska Permanent Fund Corporation: $186,090,000
Investment strategies:
- iShares® Gold Trust Micro: $186,090,000
4. Envestnet: $135,788,000
Investment strategies:
- WisdomTree Enhanced Commodity Stgy Fd: $1,008,000
- GraniteShares Bloomberg Cmdty rdStr NoK1ETF: $2,113,000
- First Trust Global Tactical Commodity Strategy Fund: $12,415,000
- First Trust Alt Abs Ret Strat ETF: $15,669,000
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $104,583,000
5. LPL: $111,780,000
Investment strategies:
- GraniteShares Blmbrg CmdtyBrdStr NoK1ETF: $486,000
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $1,434,000
- First Trust Alt Abs Ret Strat ETF: $5,667,000
- WisdomTree Enhanced Commodity Stgy Fd: $6,280,000
- First Trust Global Tactical Commodity Strategy Fund: $97,913,000
6. UBS Asset Management: $100,341,000
Investment strategies:
- USCF SummerHaven Dyn CmdtyStgy NoK-1 ETF: $1,000
- iShares® Gold Trust Micro: $2,000
- First Trust Global Tactical Commodity Strategy Fund: $76,000
- First Trust Global Tactical Commodity Strategy Fund: $100,262,000
7. D.A. Davidson & Co.: $97,988,000
Investment strategies:
- First Trust Alt Abs Ret Strat ETF: $550,000
- First Trust Global Tactical Commodity Strategy Fund: $714,000
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $96,724,000
8. SEI Investments: $95,808,000
Investment strategies:
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $95,808,000
9. RBC Wealth Management: $83,675,000
Investment strategies:
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $76,000
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $186,000
- First Trust Global Tactical Commodity Strategy Fund: $262,000
- First Trust Global Tactical Commodity Strategy Fund: $274,000
- Janus Henderson Net Zero Trnstn Rscs ETF: $1,874,000
- WisdomTree Enhanced Commodity Stgy Fd: $2,273,000
- First Trust Alt Abs Ret Strat ETF: $2,315,000
- GraniteShares Bloomberg Cmdty rdStr NoK1ETF: $4,497,000
- abrdn Bloomberg All Commodity Strategy K-1 Free ETF: $19,895,000
- First Trust Global Tactical Commodity Strategy Fund: $52,023,000
10. Atwood & Palmer, Inc.: $57,206,000
Investment strategies:
- First Trust Global Tactical Commodity Strategy Fund: $57,206,000
The list above represents the top ten Commodities ETFs holders within our institutional investor database, Dakota Marketplace. To view the rest of the list and learn more about the data within the platform, we’d love to offer a free trial.
