In the aftermath of the 2007-2009 market meltdown, commodity ETFs became all the rage. Many investors, including professionals, believed that equities were doomed to suffer further carnage in the coming years, and commodities would be the antidote.
Unfortunately for those who jumped headfirst into commodities as a way to offset stock-market weakness, that thesis hasn’t always worked so well.
For example, here are annualized returns for the iShares S&P GSCI Commodity-Indexed Trust ETF (GSG):
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3 year: 13.06%
5 year: 9.49%
10 year: -4.02%
15 year: -3.91%
In contrast, here are annualized returns for the SPDR S&P 500 ETF Trust ETF (SPY):
3 year: 19.75%
5 year: 16.43%
10 year: 14.82%
15 year: 10.33%
In every one of those time periods, equities outpaced a broad basket of commodities.
However, commodities can and do outshine stocks in certain years. Just last year, the iShares S&P GSCI Commodity-Indexed Trust returned 38.77%, while the SPDR S&P 500 ETF returned 28.75%.
Of course, neither return is shabby, and investors would take either one, but it’s telling that commodities do lead in certain market and economic cycles, even those in which equities also perform well.
In fact, year-to-date, the commodities ETF is up an almost incredible 34.72%, while the SPY ETF is down 2.52%.
For years, I’ve advocated for broad diversification in long-term portfolios. If you are a subscriber to my Cabot ETF Strategist advisory, you are familiar with our more tactical approach to swing trading using ETFs.
This approach really focuses on capturing returns from asset classes currently in favor, even if that time frame only lasts a few days or weeks.
Clearly, right now, commodities constitute a leading asset class, one that you don’t want to be missing.
Traditionally, equities have been a strong hedge against inflation. Over the past decade, while inflation was low, the S&P 500 boasted an average return of 13.95%, or 11.95% when adjusted for inflation. However, while the S&P 500 is in negative territory year-to-date, inflation is running at a rate of 7.9%, the highest 12-month increase since June 1982.
As noted above, S&P returns in the recent past easily topped inflation rates, so investors have become complacent. Even financial advisors got into the habit of reciting, by rote, “Equities are the best hedge against inflation.”
But with that trope no longer applicable (for the moment, anyway), what’s an investor to do? After all, the purpose of long-term investing, particularly for retirement, is to have spending power when it’s needed. If their equity investments can’t keep pace with inflation, investors need a Plan B.
Of course, staying ahead of inflation is not the only concern; it’s also important to continue growing portfolio value. These days, commodity ETFs allow investors to accomplish both objectives.
The 4 Best Commodity ETFs of 2022
Here are a few commodity ETFs that are among the year’s best performers so far:
- iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN): This fund is up a whopping 58.14% year-to-date. As the name says, this fund offers exposure to nickel, one of the most widely used industrial metals. The fund uses a futures-based strategy, which has risks, but to capture the returns of nickel without physical exposure, or via a mining stock, this is a good option. Be aware: Volatility increased sharply in recent weeks, tracking the spot price of nickel.
- Elements Rogers International Commodity Index ETN (RJN): This fund, which tracks an index of energy commodities, is up 51.95% so far in 2022. It, too, has been prone to wider price swings lately. It offers investors exposure to rising prices for crude oil, gasoline, heating oil, natural gas and other energy commodities. With energy being the leading sector this year, this fund is a targeted way to capture the current strength.
- Teucrium Wheat ETF (WEAT): Recent strength in this ETF is due to the Russia-Ukraine war. With those two countries being among the world’s top wheat producers, there’s understandable concern about supply shortages, sending the price of wheat higher. The ETF has returned 35.59% year-to-date, with the entirety of those gains occurring in February and March.
- iShares GSCI Commodity Dynamic ETF (COMT): This fund tracks its namesake index, offering exposure to a broad basket of commodities, using futures contracts. The commodity asset classes include the energy, metals, agriculture and livestock sectors. This ETF is up 33.48% year-to-date, and like other commodity ETFs, has seen more volatility since late February, as Russia invaded Ukraine and raised supply concerns.
Those are the best-performing commodity ETFs right now. If you want to know what other non-commodity-related ETFs I like, click here to read the latest issue of my Cabot ETF Strategist.
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