Thoughts on Global Commodities
It’s been a tough year for farmers, as a recent story in The Wall Street Journal documented1. A worldwide surplus of commodities like corn and soybeans, and the ongoing trade dispute with China, a big importer of U.S. food products, has depressed prices and created uncertainty. And then there’s the weather.
Prices for these products have always been subject to cycles of boom and bust, but this time the bust has seemed to last longer than usual. But people have to eat, the global population continues to grow, and lots of resources are finite. It’s not unreasonable to assume that prices will ultimately recover and that the industry will get more efficient as it consolidates.
Another possible benefit: global growth, which has been slowing, appears to be leveling off, according to the World Bank2. Jobs and other data coming out of the U.S. have been less than stellar, but not bad. China continues to look for ways to boost its growth, even as trade issues there appear to be on their way to some sort of resolution. The European Central Bank recently reversed course on interest rates, indicating it would be easing instead of tightening. All these actions should be good for growth, and an expanding global economy is one that will need all kinds of resources.
There are other reasons to consider exposure to this asset class. Historically, natural resources have exhibited low correlations to traditional stocks and bonds. This suggests there may be diversification benefits from allocating to the asset in a traditional portfolio. Commodities have also shown a historic tendency to do well in the later stages of an economic cycle.
Of course, different commodities may be at different points in the cycle, something that argues for maintaining a diversified portfolio. Potential holdings include livestock; precious metals; grains, food, and fiber; energy; industrial metals; timber; water; and coal. These, in turn, can be weighted by factors that include valuation and momentum to optimize the portfolio.
Commodities have always been a challenge to invest in efficiently. Many investors use futures contracts to create exposure to commodities but the process of “rolling” the portfolio from expiring contacts to longer dated contracts can be a drag on performance. These commodity funds are often structured as limited partnerships and therefore may be tax inefficient. Also, many commodities funds are weighted by production output or market capitalization however this often leads to over-concentration in oil and precious metals. A thoughtfully constructed ETF can help address these issues. For example, our IQ Global Resources ETF (GRES) invests primarily in global companies that provide exposure to the underlying commodity markets in food, energy, and other sectors and adjusts dynamically to market conditions and to seek to avoid concentration risk. We also include modest short exposures to U.S. and international equity markets to try to help manage volatility and to seek to increase the correlation of the fund to commodity spot prices.
In keeping with our recent series of fund anniversary blogs, GRES turns ten this year, too, in October. Like many of our other ETFs, it was a “first” when introduced, providing investors with a transparent, low cost vehicle for accessing this broad asset class. If you’re looking for the potential benefits of exposure to commodities, it’s a fund worth considering for suitable investors.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
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The European Central Bank is the central bank for the euro and administers monetary policy within the Eurozone, which comprises of 19 member states of the European Union and is one of the largest monetary areas in the world.
The World Bank is an international financial institution that provides loans to countries of the world for capital projects.
IQ Global Resources ETF: As the Fund’s investments are concentrated in the global resources sector, the value of its shares will be affected by factors specific to that sector and may fluctuate more widely than that of a fund which invests in a broad range of industries. The Fund also may be susceptible to foreign securities risk. Since the Fund invests in foreign markets, it will be subject to risk of loss not typically associated with domestic markets. Loss may result because of less foreign government regulation, less public information, less economic, political and social stability, or other factors. The Fund is exposed to mid- and small-capitalization company risk. Stock prices of mid-and small-capitalization companies generally are more volatile than those of larger companies and also are more vulnerable than those of large capitalization companies to adverse business and economic developments. Since the Fund may invest directly in foreign currencies or insecurities that trade in, and receive revenues in, foreign currencies, the Fund is subject to the risk that those currencies will decline in value relative to the U.S. that the U.S. dollar will decline in value relative to the currency being hedged.
The IQ Global Resourced Index uses momentum and valuation factors to identify global companies that operate in commodity-specific market segments and whose equity securities trade in developed markets, including the U.S. These segments include Precious Metals; Industrial Metals; Livestock; Energy; Grains, Food, and Fiber;, Timber, Water and Coal. Returns presented do not reflect the deduction of management fees, taxes and other expenses. The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME).
The IQ Global Resources Index is the exclusive property of IndexIQ which has contracted with Structured Solutions to maintain and calculate the Index.
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