Commodity ETFs Surge As Investors Hedge Volatility

As a way to hedge against heightened volatility in the equities market, more investors are looking at alternative investment strategies like commodities and related ETFs to diversify a portfolio.

“I don’t think a lot of people didn’t even realize that commodities were starting to rally upwards. But we got to the top of 2018 and obviously we had some impacts from the trade wars, tariffs, saw the international rhetoric and then we had the situation with crude oil where it had recovered nicely,” John Love, President & Chief Executive Officer, USCF, said at Inside ETFs.

“I think commodities are in a healthy place. The U.S. economy is still good. You’ve got some slowing in China, but slowing growth is still growth. So, I think it’s good times,” Love added.

Following some of the best performing commodities so far this year, the United States Oil Fund (USO A), which tracks West Texas Intermediate crude oil futures, surged 37.9% and the United States Gasoline Fund (UGA A), which tracks the price of gasoline also known as reformulated gasoline blendstock for oxygen blending, or “RBOB”, jumped 40.7%.

Investors interested in broad commodities exposure can look to something like the United States Commodity Index Fund (USCI A-) as a way to gain exposure to the asset class.

USCI eschews rolling front month contracts, which can lead to underperformance, especially in a contangoed market, rebalancing each month and selecting the most-backdated contracts and then the seven highest-returning contracts.

Specifically, the commodities ETF tries to reflect the performance of the SummerHaven Dynamic Commodity Index Total Return Index, which consists of 14 commodity futures. The index is reformulated each month from 27 possible futures contracts. The 14 selected contracts are equally weighted and represent six sectors: Energy (WTI crude oil, Brent crude oil, natural gas, heating oil, gasoil, RBOB gasoline), Precious Metals (gold, silver, platinum), Industrial Metals (aluminum, copper, lead, nickel, tin, zinc), Grains (corn, soybeans, soybean meal, soybean oil, wheat), Livestock (live cattle, feeder cattle, lean hogs) and Softs (coffee, cocoa, cotton and sugar).