Commodities are a good option right now for investors

With higher inflation potentially looming under the Trump administration and the unpopular asset class underperforming stocks for the second year in a row, it may be time to scoop up commodities.

The main index, the Bloomberg Commodities Index, is down 2% this year, compared with a 25% rise in the S&P 500 index. This follows a 13% decline in 2023, when the equity benchmark returned 26%.

Despite the growing popularity of so-called alternative investments such as private equity, real estate and private credit among the wealthy, most retail investors have little or no direct exposure to commodities. A Goldman Sachs survey of family offices (ultra-high-net-worth individuals who manage their own money) found that only 1% of their allocations were to commodities, compared to 26% in private equity. .

It’s estimated that $250 billion in a variety of strategies, including mutual funds and exchange-traded funds, is devoted to commodities, less than 0.5% of the S&P 500’s more than $50 trillion market capitalization.

However, there is reason to believe that commodity prices could do better in the future, especially if President Donald Trump follows through on his campaign promises on tariffs, which could drive prices higher.

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“Commodities are an inflation hedge and a diversification tool,” said Kathy Chriskey, commodity strategist at Invesco. “We may be entering a period of inflation, and commodities are the most effective hedge against inflation.”

Chriskey doesn’t have to be right about inflation for a commodity to be worth owning. That’s the point of hedging. His recommended 5% allocation might have helped in a year like 2022, when the S&P 500 fell 19% and the Bloomberg Commodity Index rose 14%. Rather than the standard 60/40 mix of stocks and bonds, a 60/35/5 portfolio that includes commodities may be a better approach in the coming years.

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Many investors invest in commodities through resource producers, primarily energy stocks, but there is also a role for direct commodity exposure. For example, over the past five years, you’ve been far better off buying gold or gold ETFs like SPDR Gold Trust than you are buying big mining companies Barrick Gold and Newmont.

Investors have access to commodities through a wide range of ETFs and mutual funds. One of the benefits of this fund is that it can offer a yield of 2% to 4% if you buy futures on margin and invest the rest in short-term Treasuries or other bonds. The required margin is only 10% and you can invest the remaining 90%.

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The largest ETF is the $4.4 billion Invesco Optimum Yield Diversification Strategy No K-1. As its name suggests, this ETF generates a 1099 tax form each year, similar to a typical mutual fund, rather than a K-1. Many investors dislike K-1s because they can cause delays and additional costs in preparing taxes. Invesco DB Commodity Index Tracking ETF produces K-1.

Different funds and ETFs track different commodity indexes and have different exposures to individual commodities. Pimco Commodities Real Return Strategy Mutual Fund tracks the Bloomberg Commodities Index, with about a third each allocated to energy, agriculture and metals. The iShares S&P GSCI Commodity Index Trust ETF and Invesco’s two commodity ETFs track indexes that are more than 50% energy, reflecting their status as the largest commodity class by annual revenue.

U.S. and Chinese flags fly from a lamppost in the Chinatown neighborhood of Boston, Massachusetts, on November 1, 2021. (Reuters/Brian Snyder/File Photo/Reuters Photo)

While some of the damage to commodities has been volatility and poor performance relative to stocks, gold has outperformed the S&P 500 returns over the past 25 years. The outlook for commodity prices is uncertain, as President Trump’s outlook for next year’s tariffs could cause overseas economies to stagnate.

But much of the bad news may already be priced into commodity markets. Benchmark U.S. oil prices have fallen 4% this year to less than $70 per barrel, and natural gas has fallen 30% to less than $3 per 1,000 cubic feet. U.S. gas is one of the cheapest energy sources in the world.

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Greg Sharenow, co-manager of Pimco Funds, said China’s economic problems are weighing on primary commodities, including oil. He sees an opportunity because investors are “estimating a low probability” of China’s success in economic growth.

An employee monitors an 8mm diameter copper cable being wound up before it passes through a rolling mill and becomes cable at the Nexans manufacturing site in Reims, northern France, on May 11, 2022. – The French cable company is the only company in this field. ((Photo by: DENIS CHARLET/AFP) (Photo by: DENIS CHARLET/AFP via Getty Images)/Getty Images)

And despite the excitement about copper as a “green metal” increasingly used in electric vehicles and renewable energy, the price of copper has barely increased this year, at just over $4 a pound. This could be a good entry point for copper, especially if China, the world’s largest consumer of copper, continues to stimulate its economy.

Silver remains an important metal in renewable energy as a component of solar panels, and total silver mining is around $30 billion per year, about one-tenth of the gold mined each year.

sun rising over corn field (St. Petersburg)

Corn and wheat prices are near multi-year lows and close to production costs, suggesting limited downside. Corn is trading at just over $4 a bushel and wheat is trading at $5.50 a bushel, about half of its 2022 peak. Jake Hanley, senior portfolio strategist at Techrium, which manages ETFs with direct exposure to a variety of grains, said the world has consumed more wheat than it has produced in four of the past five years. He says the outlook may be the best among grains. And despite the effects of global warming, the Midwest has not had a grain harvest due to drought in more than a decade. If it arrives in 2025, grain prices could skyrocket. The Techrium Corn and Techrium Wheat ETFs are trading near 52-week lows.

Gold, silver and many commodities have been under pressure since the election, in part due to rising interest rates. The Bloomberg index has fallen 3% since President Trump’s victory. Timing is important in commodity investing, and this is a good entry point for investors.

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Email Andrew Bary at andrew.bary@barrons.com.

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