Why Commodity ETFs Are Smart Investments in Today's Market

After global equities experienced a sharp sell-off in early August due to a disappointing July jobs report, both Goldman Sachs and JP Morgan raised the likelihood of the U.S. economy slipping into a recession.

However, Goldman Sachs reduced its U.S. recession forecast in late August, citing stronger economic data and corporate earnings. This suggests that the earlier rise in recession fears may have been an overreaction by market participants, which, when combined with unfavorable economic data, contributed to increased market volatility.

Fading recessionary fears does not indicate that the period of market volatility is over. With the U.S. Presidential elections coming up, the markets could once again experience an overreaction to the results, potentially causing increased volatility and panic selling. This scenario increases the need for investors to boost their portfolio exposure to commodities.

Why Investing in Commodities Is a Smart Move?

Traditional assets like equities and bonds are more exposed to market downturns. So, increasing one’s exposure to commodities, which have a low correlation with these assets, is a smart way to reduce overall investor portfolio risk.

Interest rate cuts by the Fed and a weaker dollar make certain precious metals attractive. With a 100% chance of a rate cut in September 2024, there’s a 69% likelihood that the Fed might lower the rate to 5-5.25% and a 31% likelihood of the rates falling to 4.75-5% in September, according to the CME FedWatch Tool.

Heavily tech-reliant portfolios are exposed to the risks of high valuations and concentrated rallies in select names, leaving them vulnerable to significant drawdowns if the AI-driven market bubble bursts. This makes diversification a smart strategy, making commodities a key asset for balancing portfolios.

High market expectations make it challenging for leading tech giants to deliver earnings that meet investor demands, as recently demonstrated by NVIDIA. Despite recording impressive growth in second-quarter 2024, NVIDIA’s earnings failed to meet the high expectations that had fueled its recent rally, resulting in its shares falling 6.4% on Aug. 29, 2024 (Tech ETFs That Won Amid NVIDIA-Led Tech Rout).

ETFs to Consider

Below, we highlight funds offering exposure to commodities.

Copper

Copper price has been gradually trending upward for the past few weeks driven by renewed investor demand and market optimism around interest rate cuts by the Fed.  According to CNBC, fresh demand from hedge funds is further helping the price for the red metal.

Copper is crucial for sectors like energy and for manufacturing electric vehicles, power grids, and wind turbines. With increasing focus on clean energy and global economies working toward achieving net-zero emissions, demand forecasts for the red metal is improving.

As Wall Street banks turn bullish on copper’s price, investors can look at funds like United States Copper Index Fund CPER, Global X Copper Miners ETF COPX, Sprott Copper Miners ETF COPP and iShares Copper and Metals Mining ETF ICOP.

Silver

According to analysts at UBS, as quoted on Investing.com, favorable macroeconomic conditions and strong demand are driving the rally in prices for silver. Additionally, improving financial market sentiment, rising geopolitical tensions and record-high gold prices have contributed to a recent uptick in silver prices.

The use of silver in solar panels and electrical components should fuel growth in commodity prices. Improving and robust demand from China is another tailwind for silver.

Per InvestingCube, silver’s industrial applications and increased industrial activity in the United States, China and Europe are anticipated to ensure steady growth. Funds like iShares Silver Trust SLV, abrdn Physical Silver Shares ETF SIVR, ProShares Ultra Silver AGQ and The Sprott Physical Silver Trust PSLV can be considered.

Gold

The price of the yellow commodity has been ascending as the Fed is set to cut interest rates, followed by rising geopolitical tensions in the Middle East and increasing purchases of the precious metal by central banks.

If the Fed goes ahead with a rate cut, the greenback may lose its strength. Gold prices are inversely related to the value of the U.S. dollar as gold is priced in dollars. A weaker U.S. dollar generally leads to higher demand for gold, pushing its price upward as it becomes more affordable for buyers holding other currencies.

With increasing uncertainties surrounding U.S. politics, gold offers a valuable hedge in these uncertain times. Expectations of improving demand from China and India also make investing in the yellow metal an appealing option.

Funds like SPDR Gold Shares GLD, iShares Gold Trust IAU, SPDR Gold MiniShares Trust GLDM and abrdn Physical Gold Shares ETF SGOL can be considered.

Uranium

As the world aims for net-zero emissions by 2050, nuclear power becomes a key solution for bridging the energy gap. Uranium, essential for clean, scalable and reliable energy, is seeing a surge in demand due to growing interest in nuclear energy and decreasing reliance on fossil fuels.

Surging AI use is driving the demand for data center capacity. With AI being more energy-intensive, tech giants are shifting to renewable energy to meet their needs, which further improves the demand outlook for uranium.

According to Morningstar, production cuts by Kazatomprom, the leading global uranium producer, also boosts uranium prices. Funds like Sprott Uranium Miners ETF URNM, Global X Uranium ETF URA, VanEck Uranium+Nuclear Energy ETF NLR and Sprott Junior Uranium Miners ETF URNJ can be considered.

Agriculture

Investors can consider Invesco DB Agriculture Fund (DBA) as a good option to invest in the agricultural sector. DBA has major exposure to Cocoa (26.68%), Coffee (14.68%), Soybeans (8.50%) and Corn (8.16%). The fund has gained 13.65% over the past year and 14.66% year to date.

Per CNBC, adverse weather conditions in both southeast Brazil and Ghana have boosted coffee and cocoa prices, respectively. El Niño has led to production issues in Southeast Asia, causing crop declines in major coffee producers Vietnam and Indonesia.

Broader Exposure to Commodities

For investors wanting to maintain a broader exposure to commodities, funds like First Trust Global Tactical Commodity Strategy Fund FTGC, Invesco DB Base Metals ETF DBB can be considered.

Funds like abrdn Physical Precious Metals Basket Shares ETF GLTR and Invesco DB Precious Metals Fund DBP give broader exposure to precious metals.

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