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More Rally for Commodity ETFs in the Cards?

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After a decade of underperformance, commodities are experiencing a huge rally due to the Russia-Ukraine war, chances of more inflation, pent-up demand after the COVID-19 pandemic, widespread vaccination, chances of more oncoming COVID-19 antiviral pills and still-low rates. It seems the rally will march higher in the coming days. Let’s delve a little deeper.

Russia to Ban Commodity Exports As Retaliation to Western Sanctions

Western countries have slammed back-to-back sanctions against Russia as the latter invaded Ukraine. Russian President Vladimir Putin is banning exports of certain commodities and raw materials, according to a decree issued Tuesday evening in Moscow, as quoted on Wall Street Journal. The ban will be in effect till Dec 31, according to the decree.

The decree came hours after President Biden said that the United States would ban imports of Russian oil over the country’s invasion of Ukraine and the European Union said it would aim to cut imports of Russian natural gas by two-thirds this year.

The U.K. government also said lately that it was lowering Russian oil imports by the end of 2022 and is exploring other avenues to end Russian gas imports altogether. Notably, Russia is energy-rich. And Europe is highly dependent on Russia for energy, importing about 40% of its energy requirement. No wonder, United States Brent Oil Fund, LP (BNO - Free Report) added about 42.4% past month (read: 5 Sector ETFs Benefiting From Russia-Ukraine Tensions).

It’s not only oil that has been getting a boost from the crisis. The disruptive metal and the agriculture industry is also following suit. Russia is a key supplier of grains and metals such as aluminum, nickel and palladium. A ban on exports of such commodities could upset global commodity markets. Nickel already hit an all-time high.

Rising Inflation a Plus for Commodities

Inflation is red-hot currently across the globe. The war and the resultant rally in commodity prices has amplified inflation. Commodities have historically provided some protection against inflation. They also add diversification benefits to an equity-focused portfolio.

The recovery in commodity prices, Goldman Sachs analysts said last year, “will actually be the beginning of a much longer structural bull market” that could mimic the boom in 1970s, when gold jumped 25 times, as well as the mid-to-late-2000s, when oil topped $140-a-barrel (read: 5 Reasons for the Commodity Boom: ETFs to Play).

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, tin and copper prices have been staging a continued rally.

China’s Economic Growth

Moreover, improving conditions in China, the world’s largest consumer of raw materials, has been driving commodity prices higher. China set its GDP target for 2022 at 5.5%. The world's second-largest economy beefed up supportive measures to boost growth against strong headwinds.

Against this backdrop, below we highlight a few commodity ETFs that have been on fire lately. These ETFs have gained more than 25% past month against a 7% decline in the S&P 500.

ETFs in Focus

iPath S&P GSCI Total Return Index ETN (GSP - Free Report) – Up 31.7% Past Month

iShares U.S. ETF Trust iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT - Free Report) – Up 27%

iShares S&P GSCI Commodity-Indexed Trust (GSG - Free Report) – Up 26.6%

United States Commodity Index Fund (USCI - Free Report) – Up 25.7%

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