As inflation fears rise, so are commodity prices. Here are five commodity ETFs (and one stock) to hedge against a diminished dollar.
With Congress pumping significant cash and liquidity into the economy and the Federal Reserve signaling continued low interest rates in an attempt to boost a pandemic economy, many investors are bracing for the possibility of the cruelest tax of all – inflation.
Even if you are a skeptic, why not at least hedge the possibility and make some money at the same time?
Perhaps the best inflation signal, and hedge, is via a commodity ETF or stock. Commodities are starting to move after a 10-year bear market.
Goldman Sachs points out that while the energy-heavy S&P GSCI Commodity Index has surged from its April 2020 low, its total return has been minus-60% over the past decade against a 263% total return for the S&P 500 index.
No question, natural resources like energy, metals, and agriculture are back in vogue, and perhaps everyone should get on board.
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5 Commodity ETFs and 1 Stock to Consider
Institutional investors and university endowments like Harvard’s and Yale’s have long had some investment in commodities to diversify their holdings and hedge risks. Individual investors may now want to do the same and increase their commodity exposure to 5%-10% or more of their portfolios.
For example, platinum prices have neared their highest level in six years, driven by concerns about inflation and a sharp rally in financial markets that has powered assets, from stocks to oil and bitcoin, higher.
Most actively traded platinum futures have risen about 17% so far in 2021 to $1,259 a troy ounce, outperforming most other precious metals. Since last March, platinum prices have more than doubled. ETFs backed by platinum owned 3.9 million troy ounces of the metal at the end of January, up from 3.4 million a year earlier, according to the World Platinum Investment Council.
A direct play on platinum is the Aberdeen Standard Physical Platinum ETF (PPLT).
Next, take a commodity like copper, so critical to the electrification of the grid because it conducts electricity. With electric vehicles taking off, it is worth noting that electric cars need four times as much copper as internal-combustion engines. In addition, onshore wind farms are four times as copper intensive per megawatt as traditional power plants.
A great copper play may be Freeport-McMoRan (FCX), which derives about 80% of its revenue from copper mines located all over the world. Keep in mind that developing a new copper mine can take as long as a decade, not to mention substantial capital.
Of course, the traditional way to hedge inflation is by investing in gold, though a new-age investor now might prefer a cryptocurrency, which they often refer to as “digital gold.” Popular gold ETFs include the SPDR Gold Shares (GLD), with $70 billion in gold bullion assets, and the iShares Gold Trust (IAU). Also, silver prices are in a sharp uptrend and you can capture this trend with the iShares Silver Trust (SLV).
Finally, a simple, shotgun investment vehicle could be the Invesco DB Commodity Index Tracking Fund (DBC), which allocates about 55% of its portfolio to energy, with the other 45% divided between metals and agriculture.
As you can see, there are a number of ways to gain exposure to the world of commodities, via either a commodity ETF or stock. I suggest you add some of the above ideas to your portfolio and consider subscribing to my Cabot Global Stocks Explorer advisory to learn more about how I’m playing the commodity game.