Commodities Are Falling. Here’s How to Buy The Dip.

how to, commodities are falling. here’s how to buy the dip.

After surging to record highs, some commodities are pulling back. This could be a great time for investors to jump in.

Gold and silver have been down for three consecutive sessions with Thursday’s decline so far the largest in a month. Copper is down for its second straight session on Thursday. The latest retreat follows a big surge in prices this year, a reflection of higher demand and tighter supply. Gold has already marked 22 record highs this year while silver was at its highest value in over a decade earlier this week. Copper hit a record price of $5 a pound on Tuesday.

In the agricultural market, inventories are tight for wheat due to production declines in Russia, the world’s largest exporter. The grain settled at its highest price in about a year on Tuesday. Soybean and corn prices have come under pressure, but analysts are watching for a spate of bad weather across the Midwest that can raise prices again.

Bottom line, the commodity bull market “is alive and well and has more upside,” says Peter Boockvar, the chief investment officer at Bleakley Financial Group, who likes and owns fertilizer stocks.

Financial wisdom counsels retail investors to stick to the classic 60/40 portfolio of stocks and bonds. Commodities are a speculative asset class; one day you make a fistful, the other day you are down in the dumps. They are almost entirely at the mercy of supply and demand.

But it’s reasonable to sprinkle—say, 5% to 10%—of the wonky stuff into your portfolio, especially at a time when price gains look relentless and uncertainty on inflation looms. Commodities offer a hedge against currencies and equity and bond investments, which can erode in value when inflation rises unexpectedly.

Investors can use exchange-traded funds to invest in hardgoods. It’s a more convenient way to invest in the asset class than futures, which are agreements to buy or sell a commodity at a future date for a fixed price. Futures, typically used by sophisticated investors and food manufacturers, also add significant risk to your portfolio.

Broad commodity ETFs, on the other hand, offer the desired diversification without the complexity—but choose carefully. ETFs can abruptly close if there’s lack of investor interest or poor returns. Five funds stood out when Barron’s screened for broad-basket commodity ETFs on Morningstar Direct with five years or more of trading history, at least $200 million in assets—the minimum we deem safe—and low costs.

First was the $5.3 billion Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF. One fifth of its holdings are in oil and gasoline and other energy products, 19% is in Treasuries, and a much smaller portion is in agriculture and metals. Many thematic ETFs allocate to cash and Treasuries to lower risk, ensure liquidity, and generate income.

Invesco’s ETF has returned 4.2% over the past year through the end of April. While that’s piddly compared with the S&P 500’s total-return gain of 23%, it’s achieving those gains while hedging against a potential downfall in stocks. (In 2022, it gained as much as the S&P 500 fell.) The ETF charges 0.59% in annual fees.

The Bloomberg All Commodity Strategy K-1 Free ETF charges just 0.26% in fees. It’s a passive ETF, meaning it tracks an underlying index rather than allowing managers to make investing decisions. The ETF is a good option for investors looking for equal exposure to energy and agriculture; each makes up 29% of the portfolio, and the rest is mostly in metals.

The best performer over the past five years through April among the funds was the abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF, returning 10.3%. The two abrdn ETFs hold similar commodities but the latter focuses more on longer-dated commodity futures contracts.

Contracts that expire further out in the future potentially lower the costs associated with frequently rolling near-term futures contracts. They tend to be less volatile but diverge more from spot or current prices.

Investors tempted to bet on ETFs that hold single commodities can look at SPDR Gold Shares, the largest ETF in the precious-metal category. To bet on Silver, iShares Silver Trust is the most actively tool used based on average five-year monthly flow. Within agriculture, Invesco DB Agriculture and Amplify Alternative Harvest are the only two ETFs with considerable assets under management.

These ETFs can be used to manage certain scenario risks, writes Jared Woodard, strategist at BofA Global Research. An investment in energy funds, for example, was a great move to hedge geopolitics in 2022 when Russia attacked Ukraine.

But the investment can be extremely volatile at times, he adds. These ETFs can also plummet if supply eventually catches up with demand for the particular commodity. Remember the narrower the niche, the more the potential trouble.

Write to Karishma Vanjani at [email protected]

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