Advisers weigh the appeal of the commodity rally

Advisers weigh the appeal of the commodity rally
As commodity funds post double-digit gains this year, some advisers wonder if it's too late to join the party.
APR 13, 2022

As the bad news about inflation continues to trickle out month after month, some financial advisers are finding a safe haven in commodity funds that have generated impressive gains over the past 15 months.

With the latest inflation data showing the consumer price index up 1.2% in March and posting a 12-month rise to a 40-year-high of 8.5%, the challenge now is whether it’s too late to join the commodity rally.

“We unfortunately bailed on our commodity funds in January, as we thought interest rates were in the process of topping out,” said Dennis Nolte, vice president of Seacoast Investment Services.

“Our decision to sell was premature, obviously,” he added. “We're looking at reentering at some point, but I think it's time to wait. But this commodity cycle reminds us of the '70's, meaning we like the asset class going forward, just not at this price.”

The near-term perspective is that commodity prices have already peaked for the current inflation cycle and that the ride is coming to an end, said Paul Schatz, president of Heritage Capital.

“I think it’s way too late for investors to adopt an inflation bent to their portfolios,” Schatz said. “The easiest money has been made, and now oil and commodities are back to a choppier, buy-weakness-and-sell-strength environment.”

But even if one is optimistically expecting inflation to subside, the recent performance of popular commodity funds could be too much for some investors and advisers to resist.

For example, the $8.3 billion Invesco Optimum Yield Commodity ETF (PDBC) is up 31.2% so far this year following a 41.9% gain last year.

Other examples include the much smaller $56.8 million iPath Pure Beta Broad Commodity ETN (BCM), which is up 25.9% this year after gaining 30.3% last year. The six-month-old $60 million Hartford Schroders Commodity Strategy ETF (HCOM) is up 32% this year.

“We are utilizing one-stop shop commodity ETFs and funds with a respectable 5% allocation in most of our all-weather allocated balanced portfolios to help add alpha and reduce beta overall,” said Jon Ulin of Ulin & Co. Wealth Management.

“Our core commodity funds are up 30% year to date, and 20% per year for three years rolling,” Ulin added. “As part of our core-satellite approach, we believe it prudent to hold less than 10% of trending tactical sectors and not bet the farm.”

In addition to not betting the farm, Todd Rosenbluth, head of research at ETF Trends, advises keeping commodity exposure as diverse as possible.

“Instead of trying to pick individual winners in the commodity space, use a fund that gives you broad market exposure,” Rosenbluth said. “Advisers are looking for alternatives given the inflationary environment and rising rate environment, and commodities can play a core role in a portfolio. The trend has been your friend with commodities.”

Jason Bloom, head of fixed-income alternative ETF strategy at Invesco, concurs with the direction of the trend and said financial advisers should be stepping back and looking at the bigger picture for commodities.

Whether it's related to fossil fuels or the transition to newer forms of energy, Bloom said all roads lead to supply shortages for commodities, which is good news for commodity investors.

“Longer-term factors related to an energy transition away from fossil fuels is consistently building demand for the industrial metals that will be consumed as the global transportation fleet is completely remade,” he said. “That is a massive infrastructure spend as they try to completely rebuild the global power grid that took 150 years to build in just 20 or 30 years.”

Bloom cites estimates that by the year 2030, the demand for copper related to the production of electric vehicles will be 10 times what it is today.

“That’s the demand for metals to build electric vehicles that use four times more copper than internal combustion engines,” he said. “And it takes 10 to 15 years to permit a new copper mine. So you can see the problem here. It will be very difficult for supply to meet demand.”

The ultimate irony is that the growing demand for so-called cleaner energy requires even more fossil fuels to help make the transition, Bloom said.

“You need all these metals to build the renewables, but you also need tremendous fossil fuels to accomplish the energy transition,” he said. “Demand continues to grow globally and we’re cutting off supplies of fossil fuels. It all bodes well for commodities.”

Latest News

RIAs need to visit universities to attract students
RIAs need to visit universities to attract students

RIAs need to find universities that offer financial planning programs and sponsor or host events, advisor suggests.

Orion deepens Capital Group alliance with ETF portfolio tie-up
Orion deepens Capital Group alliance with ETF portfolio tie-up

The leading wealth tech provider is helping more advisors access active ETF models through its exclusive partnership.

JPMorgan client who lost $50M amid dementia battle denied trial
JPMorgan client who lost $50M amid dementia battle denied trial

Case of once-wealthy family highlights risks, raises questions on firms' duties to sophisticated investors suffering cognitive decline.

Stifel loses huge $14.2 million arbitration claim linked to star Miami broker
Stifel loses huge $14.2 million arbitration claim linked to star Miami broker

“The evidence in this case was overwhelming,” says an attorney.

$9B Gateway Investment Advisers names Julie Schmuelling president
$9B Gateway Investment Advisers names Julie Schmuelling president

The move marks the culmination of a decade-long journey for the new leader at the Ohio-based RIA and Natixis affiliate firm.

SPONSORED Leading through innovation – with Tom Ruggie of Destiny Wealth Partners

Uncover the key initiatives behind Destiny Wealth Partners’ success and how it became one of the fastest growing fee-only RIAs.

SPONSORED Client engagement strategies, growth and retention in the down markets

Key insights from Gabriel Garcia on adapting to demographic shifts and enhancing client experience in a changing market