Commodities had a prominent role in both 2021 and 2022 but have lost some of their luster this year due to China’s economic struggles. However, given the current prices, now might be the perfect time to consider adding commodities to your core portfolio.
The Performance of Commodities
The S&P GSCI commodity index, with energy as its largest component, has experienced a slight decline of about 1% this year. Similarly, the Bloomberg Commodity Index, consisting of one-third energy, one-third metals, and the remaining portion in other commodities, has tumbled by 5.5%. In contrast, the broader stock market has seen a 16% increase.
The Long-Term Potential
There are several compelling reasons to hold commodities as part of your investment strategy. Commodities are positioned at the intersection of three significant investment themes: rising inflation, a transforming China, and the shift from fossil fuels to renewable energy.
China, being the largest consumer of commodities in the world, heavily influences the prices of raw materials like copper and crude oil. However, recent tremors in China’s economy and property market have cast a shadow on the outlook, even though commodity markets have shown resilience.
Weathering the Storm
Roland Morris, a commodity strategist and portfolio manager at VanEck, acknowledges that concerns about the demand outlook have plagued commodities throughout the year. Despite lackluster performance, Morris points out that the asset class has held up relatively well given the challenging circumstances.
Considering the significant headwinds faced this year, such as disappointing growth in China and Europe’s recession, the resilience of commodities is rather impressive.
Seizing Investment Opportunities
To capitalize on the potential of commodities, VanEck recently introduced the VanEck CMCI Commodity Strategy exchange-traded fund (“CMCI”). This ETF is based on the same underlying index as its mutual fund counterpart (CMCAX), which already boasts $576 million in assets. Since its launch in 2010, the mutual fund has received a four-star, gold-medal rating from Morningstar and has returned 2.6% this year.
In conclusion, while commodities may have lost some luster in the current economic climate, they still hold long-term value and can serve as an essential component of an investment portfolio.
The Outlook for Commodities in the Second Half of the Year
by Lauren Foster
As the second half of the year approaches, experts have differing views on the outlook for commodities. Kathy Kriskey, senior commodities ETF strategist at Invesco, remains cautiously optimistic, believing that China will work through its challenges and continue to drive demand. Kriskey suggests that investors consider allocating 5% to 8% of their portfolios to commodities, considering their historical ability to hedge against inflation.
Pimco, a leading investment management firm, is also bullish on commodities as an inflation hedge. In May, they launched their first commodities ETF, the Pimco Commodity Strategy Active (CMDT). The fund’s portfolio manager, Greg Sharenow, states that the goal of the strategy is to provide a hedging solution for inflation. With over $197 million in assets and strong three-month returns of 12.2%, the fund has outperformed its peers in its category.
However, not all experts share this enthusiasm. Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management, believes that broad commodities may not be suitable for long-term portfolio strategies. He cites the lack of sufficient compensation for the risks associated with commodities, which are known for their volatility and unpredictability. Haworth advises investors to proceed with caution.
The future performance of commodities will also depend on the state of China’s economy. If China continues to experience a slowdown, commodities are likely to face increased volatility. However, certain metals crucial to the energy transition, such as copper, may prove to be more resilient.
In conclusion, while some experts remain optimistic about commodities as an investment option, others urge caution. As always, it is crucial for investors to carefully consider their risk tolerance and long-term investment goals when deciding whether or not to allocate a portion of their portfolios to commodities.