Despite the Omicron variant taking center stage, inflation continues to percolate in the market backdrop, which is something commodities can soothe.
“It’s not appealing for investors or from a return standpoint. The only appeal there is the diversifying effect, but you can get the same thing in commodities,” said Jeff Weniger, head of equity strategy at WisdomTree, who noted that investors should have a 60/30/10 stocks/bonds/commodities split in the current market landscape. “Commodities are going to the soothing balm for your portfolio if inflation continues to rise.”
One way to get that commodities allocation as opposed to holding several positions is via one exchange traded fund (ETF). One such fund is the Invesco DB Commodity Index Tracking Fund (DBC ).
Aside from being an inflation hedge, commodities can give investors access to assets that are uncorrelated to the broad equities market. The latest whipsaws in the equities market thanks to COVID-19 call for commodities exposure to help mute the volatility.
Commodities typically march to the beat of their own drum, giving a portfolio much-needed diversification. When interest rates do eventually rise, commodity prices will move higher as well and provide this hedging component.
Per the fund’s description, DBC seeks to track changes, whether positive or negative, in the level of the DBIQ Diversified Agriculture Index Excess Return™ (DBIQ Diversified Agriculture Index ER or Index) plus the interest income from the fund’s holdings of primarily U.S. Treasury securities and money market income less the fund’s expenses.
Two Other ETF Options
For concentrated exposure in rising food prices, there’s the Invesco DB Agriculture Fund (DBA ), which seeks to track changes in the level of the DBIQ Diversified Agriculture Index Excess Return Index. The index, which is comprised of one or more underlying commodities, is intended to reflect the agricultural sector.
An ideal inflation hedge is adding gold, which can be accomplished with ETFs like the Invesco DB Gold (DGL ). DGL seeks to track changes in the level of the DBIQ Optimum Yield Gold Index Excess Return™ (DBIQ Opt Yield Gold Index ER) plus the interest income from the fund’s holdings of primarily U.S. Treasury securities and money market income less the fund’s expenses.
DGL is designed for investors who want a cost-effective and convenient way to invest in commodity futures. The index is a rules-based index composed of futures contracts on gold.
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