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Commodity ETFs in the Sweet Spot This Year

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After logging the longest rally since 1991, commodities have failed to thrive this year with the Bloomberg Commodity Index, which measures returns on 22 raw materials, shedding 2.5% so far. This is largely because of a strong dollar, Trump’s protectionist policies and weakening economic growth in many parts of the word that have dampened the appeal for these commodities.

While the U.S. economy is improving, slowdown in the world’s largest consumer of raw materials – China – as well as cooling growth in Europe, Japan and other emerging markets led to the sluggish trading in commodities. Increasing trade frictions and the growing tit-for-tat exchange in tariffs have added to the woes leading to a strong U.S. dollar, which had its best first half in three years. The dollar strengthened especially in the second quarter in the wake of inflationary pressures and trade war fears (read: U.S. Dollar ETF Hits New 52-Week High).

A high dollar made dollar-denominated assets expensive for foreign investors, potentially diminishing demand for the commodities.

Any Bright Spot?

Precious metals and agricultural commodities were the major losers. The trade spat between the United States and its major trading partners, especially China has led to fears of global recession hurting these commodities. In particular, gold, often viewed as a safe haven, was dragged down by a hawkish Fed, while soybean price was hit hard by China’s retaliatory measures.

However, energy, cocoa and wheat made up the gainers list. U.S. crude gained more than 20% in first half of 2018 buoyed by soaring demand, reducing supplies from Venezuela, Libya and Canada, threats of supply disruption from Iran as a result of sanctions, and of course the historic output cut deal between the OPEC, Russia and other producers (read: Is $100-a-Barrel Oil Possible? ETFs in Focus).

Cocoa prices are up this year owing to drought conditions in Ivory Coast and Ghana — the world’s largest producers of cocoa beans — that have threatened output. Notably, 70% of the world’s cocoa comes from West African nations like Ghana and Ivory Coast. Wheat prices gained on unfavorable weather conditions and planting delays that kept supply at check. Tariffs and trade issues also weighed on U.S. wheat production.

Outperforming ETFs from These Zones

Given this, we have highlighted the best-performing ETFs focused on these commodities and are expected to continue their strong movement heading into the second half based on current trends:

iPath Bloomberg Cocoa Subindex Total Return ETN (NIB - Free Report)

This note follows the Bloomberg Cocoa Subindex Total Return, which delivers returns through an unleveraged investment in the futures contracts on cocoa. It has been able to manage $37.1 million in AUM and trades in a good volume of 71,000 shares per day. Expense ratio comes in at 0.70%. The note has surged 27.6% so far this year and carries a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook (read: Top and Flop ETFs of Last Week).

United States Oil Fund (USO - Free Report)

This is the most popular and liquid ETF in the oil space with AUM of $1.8 billion and average daily volume of around 20.4 million shares. It seeks to match the performance of the spot price of West Texas Intermediate (WTI or U.S. crude). USO's benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the benchmark will be the next month contract to expire. USO has 0.76% in expense ratio and has gained 24.2% this year (read: Top & Flop ETF Areas of Q2).

Teucrium Wheat Fund (WEAT - Free Report)

This fund provides exposure to the wheat market in a unique way and reduces the effects of both contango and backwardation. It uses three futures contracts for wheat, all of which are traded on the CBOT Futures Exchange. The three contracts include the second-to-expire contract, weighted 35%; the third-to-expire contract, weighted 30%; and the contract expiring in the December following the expiration month of the third-to-expire contract, weighted 35%. The fund has amassed $64.1 million in its asset base and trades in a good volume of about 213,000 shares a day. The product is a high-cost choice in the agricultural space as it charges a fee of 1.74% per year. It has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

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