The stars align for commodities.
This could be commodities’ year. In each of the 50 years when gross domestic product growth exceeded the unemployment rate, commodities enhanced stock portfolio returns while reducing risk. This year the potential for higher inflation and a robust global economy favor an upswing for this asset class. Commodities do best when the dollar falls and the economy is growing, says Shawn Hackett, president of Hackett Financial Advisors. Even Mother Nature could contribute to a rebound. Hackett is watching two potential events: El Nino and fewer sunspots, both of which can produce poor weather leading to smaller harvests and higher food prices. Here are several commodity investments ripe for the picking.
PowerShares DB Base Metals Fund (DBB)
Base metals have the best outlook for all commodities markets now that oversupplies have been whittled down, says Rob Haworth, senior investment strategist with U.S. Bank Wealth Management in Seattle. Goldman Sachs also has a positive outlook for base metals as emerging market economies ramp up. The DBB exchange-traded fund holds three equally weighted futures metals contracts — aluminum, copper and zinc — and is structured to minimize the harmful effects of paying higher prices for new futures contracts, known as contango. Like many ETFs trading commodity futures, the fund is a commodities pool and therefore a limited partnership, with a K-1 form distributed to investors. The form imposes additional tax-reporting paperwork.
iPath Series B Bloomberg Copper Subindex Total Return ETN (JJCB)
This single-commodity fund tracks futures for copper, which investors often prefer because of its widespread industrial use and high trading volume. Like all other commodities investments using futures contracts that this slideshow features, JJCB minimizes contango but is an exchange-traded note — a bank-issued debt note. Barclays issued this ETN to replace its original copper note, iPath Bloomberg Copper Subindex Total Return (JJC), which Barclays will delist soon, so JJCB should benefit from new inflows; assets under management are only $10 million now. A benefit of commodities ETNs is that there are no K-1 forms at tax time, but as with all ETNs, investors take on any potential credit risks of the issuer.
iShares Gold Trust (IAU)
Rising demand from gold’s top consumers — emerging markets — should boost this precious metal, says Goldman Sachs analyst Michael Hinds. Goldman Sachs raised its 2018 forecast for gold prices to $1,450 an ounce. With an expense ratio of 0.25 percent, IAU is one of the lowest-cost ETFs to track the gold spot price, which is based on gold bars held in vaults around the world. One IAU share represents a hundredth of an ounce of gold, making the fund’s price cheaper than its best-known competitor, SDPR Gold Trust (GLD), which represents a tenth of an ounce. Because IAU holds physical gold and is classified as a collectible, investors’ capital gains are taxed at 28 percent.
iPath Series B Bloomberg Grains Subindex Total Return ETN (JJGB)
Of all the agricultural commodities, grain markets have the best trading outlook, Hackett says. If so, this ETN should benefit by tracking an index for the three main grain futures contracts: corn, wheat and soybeans. Grain markets had suffered from excess production, but supplies are coming down and could be diminished further if El Nino delivers bad weather, Hackett says. Like the iShares copper ETN, JJGB is another Barclays-issued exchange-traded note, with the same counterparty credit risks applying to investors. JJGB will replace the soon-to-be delisted Barclays-issued grain ETN, iPath Bloomberg Grains Subindex Total Return (JJG). The new note provides identical exposure.
Global X Fertilizers/Potash ETF (SOIL)
Farmers always need fertilizer to grow crops, and this niche ETF, which invests in fertilizer companies, is a way for investors who don’t want to trade the commodities markets to get agriculture exposure, Hackett says. A market-cap weighted fund, SOIL differs from other ETFs specializing in agricultural stocks because of its heavier tilt to medium and small companies, which make up 75 percent of the portfolio. With less than 30 percent of the fund’s holdings in the U.S., SOIL also offers global diversification.
Teucrium Wheat Fund (WEAT)
Of the three grain futures markets, wheat may have the best opportunity to rally, Hackett says, noting that, relative to other commodities, wheat prices are at their cheapest in 45 years. Low prices, plus the lowest U.S. planted acreage for wheat in decades, mean wheat values could rise, he says. Besides the futures market, the only way to get pure exposure to wheat is via the Teucrium Wheat Fund, an ETF that tracks an index of wheat futures contracts and charges a hefty 2.5 percent expense ratio. The fund’s commodities pool structure also means investors have the K-1 to report on their tax returns.
iPath Bloomberg Cocoa Subindex Total Return ETN (NIB)
Sitting squarely above their 200-day moving average, cocoa prices could challenge 2017’s highs, pushing the market into further gains, says Tim Taschler, investment executive at Sprott Global Resource Investments. A Commerzbank research report that found global cocoa supplies lower than expected also anticipates rising prices. For investors who want pure unadulterated exposure to chocolate’s key ingredient, NIB is an exchange-traded note that follows an index made up of a single cocoa futures contract.
Titan International (TWI)
For a single-stock, indirect agricultural play, Hackett likes TWI, a supplier of tires and wheels for all major agricultural equipment makers and other machinery manufacturers. Because of its specialized niche, Titan sometimes flies under the radar, unlike other well-known publicly traded farm machinery stocks like Deere & Co. (DE), Hackett says. The stock is also cheap. At about $14, TWI is down significantly from its peak during the last grain bull market in 2011, when shares traded just north of $30. The share price recently perked up after fourth-quarter 13-F filings showed that investment firm Oppenheimer Co. added TWI to its holdings.
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8 Commodity Plays Ripe for the Picking originally appeared on usnews.com
