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Is It a Supercycle of Commodities? Tap 5 ETFs

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Commodity prices are on the rise. From crude to metals to crops, commodities have been off to an awesome start to 2021 as investors are betting big on inflationary expectations and eyeing everything that provide hedges for inflation.

The Bloomberg Commodity Spot Index, which tracks price movements for 23 raw materials, is now at its highest since March 2013. The gauge has already jumped 67% since reaching a four-year low in March.

JPMorgan Chase & Co. said in early February that commodities have probably started a new supercycle – a prolonged period during which prices are pretty above their long-term trend. Goldman Sachs Group Inc. also believes the same. Commodities have seen four comparable cycles over the past 100 years, as quoted on a Bloomberg article.

Vaccination, Easy Money & Fiscal Stimulus Driving the Rally

The start of vaccination has led to faster-than-expected global economic recovery and boosted demand for economically-sensitive materials, ranging from oil to copper. Commodities like corn and copper are receiving an upward thrust due to China buying (read: 3 Reasons Why Commodities ETFs May Rally in 2021).

China is stocking up corn, having already purchased a record amount of the commodity, while soybean purchases are running at the quickest clip since 1991. Sugar has also set an upward journey, with Alvean, the world’s largest trader of the sweetener, foreseeing two years of shortfall ahead.

Copper an extremely sensitive metal to economic conditions, is now trading at a 10-year high level. Crude is also witnessing an uptrend mainly because of Saudi’s decision to cut production and economic rebound. Palladium should stage a rally as stringent emission control norms have been fueling demand for the metal in the auto industry.

Meanwhile, the Biden administration in the United States has been planning to come up with a hefty fiscal stimulus, which in turn calls for another run-up in the United States as well as global economic growth forecasts and higher demand for commodities. Extremely low levels of global interest rates have also strengthened the consumption demand. Needless to say, all these fiscal and monetary policies will push up inflation, where commodities pose themselves as a great hedge.

Softer U.S. Dollar Ahead?

The Fed has pledged to hold rates near zero and will continue the asset purchase program at the current rate until “substantial further progress” has been made toward reaching maximum employment and healthy inflation. With several economic data including that of the labor market coming in downbeat of late, the Fed is likely to stay put this year.

Such a Fed move should keep the greenback subdued this year.Also, if there is a continued rise in U.S. inflation, the greenback has chances of losing value. Moreover, inflation is likely to drive input costs for exports, which in turn makes a nation's exports less competitive. This will widen the trade deficit and cause the currency to fall further. If these were not enough, growing risk-on sentiments will dull the greenback’s safe-haven demand. All these factors will likely boost the prices of commodities that are usually priced in the U.S. dollar.

Drive for a Clean Globe Aiding Metal Prices

There has been a global chorus for green economy. The Biden administration in the United States also supports the agenda greatly. The move looks to supress fossil fuel like oil and gas while beef up the proportion of renewable energy like solar and wind. Such conversion to renewability requires proper infrastructure, batteries and electric vehicles, which in turn boosts the demand for various kinds of metals, as believed by market researchers.  

“The mega-trends that we see playing out around global population growth, the electrification thematic and the energy transition, all of these bode well for commodity demand over the medium-to-long term,” Mike Henry, the chief executive officer of mining giant BHP Group, said recently in a Bloomberg Television interview.

ETFs to Bet On

Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC - Free Report)

Asset: $3.91 billion; Expense Ratio: 0.59%; YTD Return: 15.5%

Invesco DB Commodity Index Tracking Fund (DBC - Free Report)

Asset: $1.83 billion; Expense Ratio: 0.85%; YTD Return: 15.4%

iShares S&P GSCI Commodity-Indexed Trust (GSG - Free Report)

Asset: $1.10 billion; Expense Ratio: 0.76%; YTD Return: 17.1%

iPath Dow Jones-UBS Commodity ETN (DJP - Free Report)

Asset: $577.1 million; Expense Ratio: 0.70%; YTD Return: 13.2%

First Trust Global Tactical Commodity Strategy Fund (FTGC - Free Report)

Asset: $497.8 million; Expense Ratio: 0.95%; YTD Return: 12.4%

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