After a decade of underperformance, commodities are experiencing a huge rally thanks to optimism over global economic growth, reflation trade, widespread vaccination, the chances of approval of more COVID-19 antiviral pills, rising consumer confidence and higher housing price. The Dow Jones Commodity Index
jumped about 70% in the year to June. Let’s delve a little deeper. Subdued Greenback
The massive liquidity injections by the Fed and the resultant subduedness in the strength of the greenback as well as fiscal stimulus have also been driving the commodity prices. Investors should note that most of the commodities are priced in the U.S. dollar and hence outperforms when the U.S. dollar remains subdued.
Rising Inflation a Plus for Commodities
If this was not enough, reflation trade was palpable across the globe with the United States and Europe drawing attention lately. Commodities are often viewed as a hedge against inflation. Moreover, higher inflation is feared to weaken corporate earnings, which in turn, would hurt equity prices. In such a scenario, commodities may gain as an alternative investment.
Environmental Concerns A Plus for Some Metals A global push for carbon-free economy has also played its role in booting the commodity prices. The very socially responsible drive may cause a supply crunch in the commodity space, which is boosting prices. Lithium is one such commodity, which is proving to be a great beneficiary of the boom in the battery market.
Demand for the materials used in electric cars and renewable-energy storage has surged lately, while miners are striving hard to boost supply.Aluminum prices increased to their highest level since 2008, and copper prices continued its latest rally.
Tin prices have jumped 90% since the start of 2021 partly due to power rationing. Energy Rally On Cheap Valuation & Higher Demand
Meanwhile, U.S. West Texas intermediate crude oil futures set a fresh seven-year high and crossed $82 per barrel. Supply crunch and higher fuel demand pushed the long-ailing oil prices higher providing a boost to inflation.
Agricultural Boom on Weather & Other Concerns
Most of the agricultural commodities surged in the third quarter. Coffee prices are rising due to weather concerns in the top-producing country Brazil. Global coffee prices are forecast to touch $4.44 a kilogram due to Brazilian cold snap due to drought situation in growing region and supply chain issues.
Meanwhile, cocoa production in the world's top grower Ivory Coast is expected to drop up to 11% in the 2021/2022 season that starts on Oct 1. Raw sugar futures on ICE hit the highest since August-end boosted by falling supplies from Brazil and higher demand from the United States (read:
3 Top Areas of Q3 & Their Top ETFs).
Cotton prices jumped to a 10-year high, touching the highest levels
since July 2011. Demand for textiles surged due to the global economic reopening, while India — a major cotton exporter — constrained shipments to help its domestic partners, per a CNBC article. Droughts and heat waves, have weighed on cotton crops across the United States, which is the biggest exporter of the commodity in the world.
Against this backdrop, below we highlight a few ETFs that can be played in such a scenario.
Invesco DB Commodity Index Tracking ETF ( DBC Quick Quote DBC - Free Report)
The underlying DBIQ Optimum Yield Diversified Commodity Index Excess Return Index is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. The fund charges 88 bps in fees.
Global X Lithium & Battery Tech ETF ( LIT Quick Quote LIT - Free Report)
The underlying Solactive Global Lithium Index tracks the performance of the largest and most liquid listed companies that are active in the exploration and/ or mining of Lithium or the production of Lithium batteries. The fund charges 75 bps in fees.
iPath Series B Bloomberg Aluminum Subindex Total Return ETN ( JJU Quick Quote JJU - Free Report)
The Bloomberg Aluminum Subindex Total Return reflects the returns that are potentially available through an unleveraged investment in the futures contracts on aluminum. The product charges 45 bps in fees.
Teucrium Corn ETF ( CORN Quick Quote CORN - Free Report)
The CBOT Corn Futures Contract looks to reflect the daily changes of a weighted average of the closing prices for three futures contracts for corn that are traded on the CBOT. The expense ratio of the fund is 1.95%.
iPath Series B Bloomberg Coffee Subindex Total Return ETN ( JO Quick Quote JO - Free Report)
The Bloomberg Coffee Subindex Total Return reflects the returns that are potentially available through an unleveraged investment in the futures contracts on coffee. The fund charges 45 bps in fees.
iPath Bloomberg Softs Subindex Total Return ETN ( JJS Quick Quote JJS - Free Report)
This fund follows the Bloomberg Softs Subindex Total Return, which consists of three softs commodities futures contracts (coffee, cotton and sugar).