“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:
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:
While the benefits of an active approach may include:
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.
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.
Written By: Gui Costin, Founder, CEO
Gui Costin is the Founder and CEO of Dakota.
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