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Commodity Prices on an Unstoppable Rally: ETFs to Benefit
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After 10 years of underperformance, commodities are on an unstoppable rally this year thanks to recovering global economic growth from the pandemic lows, reopening economies, reflation trade and massive stimulus flows. The central banks across the globe have injected trillions of dollars to stave off the pandemic-ravaged economy.
A weaker greenback added to the strength as it makes dollar-denominated assets attractive for foreign investors, raising the appeal for commodities. This is because commodities are often viewed as a hedge against inflation and a weaker dollar (read: 3 ETFs to Protect Against Inflation).
China, the world’s largest consumer of raw materials, has been driving commodity prices higher on improving conditions. The world’s second-biggest economy saw a record 18.3% growth in the first quarter of 2021. This represents the biggest jump in GDP since China started keeping quarterly records in 1992. China is buying a record quantity of soybeans, as well as grains like corn and wheat, and is trying to reduce the production of the key metals like steel and aluminum. Food prices are seeing a spike due to poor weather in the key growing nations like Brazil.
Lumber is also not behind as surging demand for suburban housing on record low mortgage rates and migration from cities continue to push its prices higher. The demand for air travel and cars has seen a surge, driving jet fuel prices higher, as restrictions have been eased and the economy has reopened. Manufacturing and industrial activities are also picking up with a spike in metal prices. Additionally, crude oil prices rebounded from record lows reached during the pandemic on accelerating demand and tight supply (read: 5 ETFs at The Heart of the Commodity Comeback This Year).
JPMorgan expects a continued rally in commodities as reflation and reopening trade will continue given that the Fed views inflation as temporary, which means that the economies will get over heated, resulting in more demand. Meanwhile, Goldman projects commodities to rally another 13.5% over the next six months on a worldwide reversal of coronavirus curbs, lower interest rates and a weaker dollar.
While the rallying commodities prices have sparked inflationary pressure, resulting in a stock market decline, it is a boon for many corners of the space. We have presented five ETFs from different zones that are expected to benefit from the surging commodities:
Rising commodity prices are a huge boon for resource-rich economies and the related ETFs as these will generate higher tax revenues for these countries. One of the best ways to invest in these countries is through EWA, which offers exposure to the companies in Australia. The fund tracks the MSCI Australia Index, holding 65 stocks in its basket. It has $1.7 billion in AUM and charges 51 bps in annual fees. The fund has gained 10.8% so far this year and has a Zacks ETF Rank #2 (Buy). Notably, Australia is the world’s largest exporter of iron ore, liquefied natural gas and coking coal used to make steel. It is also the world’s third-largest gold producer and the biggest net exporter of the precious metal, and is a top supplier of battery metals such as nickel and lithium.
VanEck Vectors Russia ETF
The Russian economy is driven mostly by exports of commodities. Russia is the second-largest producer of crude oil (behind Saudi Arabia), the fifth-largest steel exporter, the world’s biggest wheat exporter and is currently ranked seventh in the world for corn exports. This ETF offers exposure to 29 companies that are incorporated in Russia or outside of Russia but has at least 50% of their revenues/related assets in Russia. It follows the MVIS Russia Index, charging investors 61 bps in annual fees. RSX is popular and liquid with AUM of $1.8 billion and trades in an average daily volume of 4.7 million shares. It has gained 13.3% so far this year and carries a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Why Agricultural Commodity ETFs Are Soaring This Year).
WisdomTree Emerging Currency Strategy Fund (CEW - Free Report)
Emerging market currencies would benefit from higher commodity prices. According to Reuters, emerging currencies tied to commodity-exporting countries could outperform the U.S. dollar over next year. CEW seeks to achieve total returns reflective of both money market rates in selected emerging market countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar. It charges 55 bps in annual fees and trades in an average daily volume of 9,0000 shares. The product has gained 1.2% in a month.
SPDR S&P North American Natural Resources ETF (NANR - Free Report)
This ETF provides exposure to U.S. and Canadian publicly traded large and mid-cap companies within the sub???industries of the energy, metals & mining or agriculture categories with 45%, 35% and 20% share, respectively. It follows the S&P BMI North American Natural Resources Index, holding 29 stocks in its basket. The fund has amassed $686.2 million and charges 35 bps in annual fees. It trades in a moderate volume of 120,000 shares a day on average and has soared 30% so far this year (read: Inflation Is Picking Up: 5 ETFs to Make the Most of It).
Invesco DB Commodity Index Tracking Fund (DBC - Free Report)
This fund follows the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which is composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. With AUM of $2.6 billion, it trades in volume of 3.4 million shares per day on average and charges 88 bps in annual fees. The product is up 22.3% so far this year.
Bottom Line
The above-mentioned ETFs could be worthwhile when commodity prices are booming. This is especially true when the dollar is showing some weakness and investors are again gaining confidence in the broad commodity world.
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Commodity Prices on an Unstoppable Rally: ETFs to Benefit
After 10 years of underperformance, commodities are on an unstoppable rally this year thanks to recovering global economic growth from the pandemic lows, reopening economies, reflation trade and massive stimulus flows. The central banks across the globe have injected trillions of dollars to stave off the pandemic-ravaged economy.
A weaker greenback added to the strength as it makes dollar-denominated assets attractive for foreign investors, raising the appeal for commodities. This is because commodities are often viewed as a hedge against inflation and a weaker dollar (read: 3 ETFs to Protect Against Inflation).
China, the world’s largest consumer of raw materials, has been driving commodity prices higher on improving conditions. The world’s second-biggest economy saw a record 18.3% growth in the first quarter of 2021. This represents the biggest jump in GDP since China started keeping quarterly records in 1992. China is buying a record quantity of soybeans, as well as grains like corn and wheat, and is trying to reduce the production of the key metals like steel and aluminum. Food prices are seeing a spike due to poor weather in the key growing nations like Brazil.
Lumber is also not behind as surging demand for suburban housing on record low mortgage rates and migration from cities continue to push its prices higher. The demand for air travel and cars has seen a surge, driving jet fuel prices higher, as restrictions have been eased and the economy has reopened. Manufacturing and industrial activities are also picking up with a spike in metal prices. Additionally, crude oil prices rebounded from record lows reached during the pandemic on accelerating demand and tight supply (read: 5 ETFs at The Heart of the Commodity Comeback This Year).
JPMorgan expects a continued rally in commodities as reflation and reopening trade will continue given that the Fed views inflation as temporary, which means that the economies will get over heated, resulting in more demand. Meanwhile, Goldman projects commodities to rally another 13.5% over the next six months on a worldwide reversal of coronavirus curbs, lower interest rates and a weaker dollar.
While the rallying commodities prices have sparked inflationary pressure, resulting in a stock market decline, it is a boon for many corners of the space. We have presented five ETFs from different zones that are expected to benefit from the surging commodities:
iShares MSCI Australia ETF (EWA - Free Report)
Rising commodity prices are a huge boon for resource-rich economies and the related ETFs as these will generate higher tax revenues for these countries. One of the best ways to invest in these countries is through EWA, which offers exposure to the companies in Australia. The fund tracks the MSCI Australia Index, holding 65 stocks in its basket. It has $1.7 billion in AUM and charges 51 bps in annual fees. The fund has gained 10.8% so far this year and has a Zacks ETF Rank #2 (Buy). Notably, Australia is the world’s largest exporter of iron ore, liquefied natural gas and coking coal used to make steel. It is also the world’s third-largest gold producer and the biggest net exporter of the precious metal, and is a top supplier of battery metals such as nickel and lithium.
VanEck Vectors Russia ETF
The Russian economy is driven mostly by exports of commodities. Russia is the second-largest producer of crude oil (behind Saudi Arabia), the fifth-largest steel exporter, the world’s biggest wheat exporter and is currently ranked seventh in the world for corn exports. This ETF offers exposure to 29 companies that are incorporated in Russia or outside of Russia but has at least 50% of their revenues/related assets in Russia. It follows the MVIS Russia Index, charging investors 61 bps in annual fees. RSX is popular and liquid with AUM of $1.8 billion and trades in an average daily volume of 4.7 million shares. It has gained 13.3% so far this year and carries a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Why Agricultural Commodity ETFs Are Soaring This Year).
WisdomTree Emerging Currency Strategy Fund (CEW - Free Report)
Emerging market currencies would benefit from higher commodity prices. According to Reuters, emerging currencies tied to commodity-exporting countries could outperform the U.S. dollar over next year. CEW seeks to achieve total returns reflective of both money market rates in selected emerging market countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar. It charges 55 bps in annual fees and trades in an average daily volume of 9,0000 shares. The product has gained 1.2% in a month.
SPDR S&P North American Natural Resources ETF (NANR - Free Report)
This ETF provides exposure to U.S. and Canadian publicly traded large and mid-cap companies within the sub???industries of the energy, metals & mining or agriculture categories with 45%, 35% and 20% share, respectively. It follows the S&P BMI North American Natural Resources Index, holding 29 stocks in its basket. The fund has amassed $686.2 million and charges 35 bps in annual fees. It trades in a moderate volume of 120,000 shares a day on average and has soared 30% so far this year (read: Inflation Is Picking Up: 5 ETFs to Make the Most of It).
Invesco DB Commodity Index Tracking Fund (DBC - Free Report)
This fund follows the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which is composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. With AUM of $2.6 billion, it trades in volume of 3.4 million shares per day on average and charges 88 bps in annual fees. The product is up 22.3% so far this year.
Bottom Line
The above-mentioned ETFs could be worthwhile when commodity prices are booming. This is especially true when the dollar is showing some weakness and investors are again gaining confidence in the broad commodity world.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>