Commodity ETFs can access the inflationary cushion of raw materials.
Inflation was already on the rise before Russia invaded Ukraine, as the global economic recovery boosted prices for oil, natural gas, metals and agricultural products. But the war in Ukraine has sent prices even higher. “The threat of disruption to the supply chains of everything from oil to corn sent commodity prices spiking,” says Chris Beauchamp, chief market analyst at online trading platform IG. Commodities can be a hedge against inflation, but they are notoriously volatile. Still, especially in light of the Biden administration’s ban on the import of Russian oil and natural gas, and a retaliatory move by Russia to limit exports, using these exchange-traded funds is an easy way to invest in red-hot commodities in the short term. “The Russia-Ukraine impact on commodity prices has been impressive thus far and may continue to produce upward pressure on prices if the conflict escalates and is prolonged,” says Robert Davis, chief investment officer of Round Table Wealth Management.
Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (ticker: BCI)
This broad commodities ETF gives investors exposure to more than 20 commodities across energy, agriculture, industrial and precious metals and livestock. As of Dec. 30, its top three holdings were gold, crude and natural gas. So it’s not surprising this fund is up more than 16% over the past month as those commodities have been surging. The fund’s wide variety of holdings produce a diversified exposure for investor portfolios, Davis says. “We are not targeting specific commodity sectors as they relate to the Russia-Ukraine war,” he says. “For investors seeking exposure to commodities, we believe broad-based exposure makes a lot of sense.”
SPDR Gold Shares (GLD)
For those investors who do want to target individual commodities, gold has been one of the major beneficiaries from the war in Ukraine. Investors often buy the precious metal as a perceived safe haven in times of geopolitical turmoil. Gold is also considered an inflation hedge, as it can hold its value better than the U.S. dollar in the long term. With inflation high, gold was ascendant even before the war in Ukraine began. Rather than investing in gold mining stocks, this fund buys physical gold bullion. Investors can buy shares without the hassle of storing and insuring physical gold themselves.
Aberdeen Standard Physical Palladium Shares ETF (PALL)
Palladium is widely used in catalytic converters for diesel vehicles, and Russia is one of the top producers of the metal. “Palladium prices remain sensitive to the Russia-Ukraine crisis from the threat of disruption to production and exports,” says Shaun Murison, senior market analyst with IG. That’s on top of the palladium market already being in deficit long before the war. “Limited production is positive for the price of palladium, especially if the automotive sector disruptions abate and the global economy continues to rebound,” he says. One risk for the metal’s price is if it becomes so costly that the auto industry switches to a more cost-effective metal such as platinum, which is often used in gasoline vehicles, he says. In a similar fashion to GLD, this ETF is backed by physical palladium.
United States 12 Month Oil Fund (USL)
Worries have been swirling that Russia might use its energy exports as a weapon, retaliating against sanctions by curtailing oil and natural gas exports. But two can play that game, and although initial U.S. sanctions sidestepped Russia’s oil and gas industry for fear of widespread ramifications for the European and U.S. economies, the escalation of the conflict led to an announcement of Biden’s outright ban on Russian energy imports. There’s also the fear of major damage to energy infrastructure running from Russia through Ukraine to Europe. Unlike the palladium and gold funds, USL doesn’t own actual oil. Instead, it’s benchmarked to futures contracts that expire over the course of 12 consecutive months.
United States 12 Month Natural Gas Fund (UNL)
This fund offers a similar way to invest in natural gas prices, which like those for oil have been on the rise as the global economy gets back on its feet after the pandemic. Increasing demand has been outstripping supply. With Russia being the second-biggest natural gas producer after the U.S., 2022’s disruptions have prices moving back toward the multi-year high they hit in 2021. Natural gas prices in Europe and Asia have been much higher than in the U.S. That’s been encouraging exports of the commodity in liquid form, helping to keep domestic supplies tight.
Teucrium Wheat ETF (WEAT)
Because natural gas is also used to make fertilizer, higher gas prices could result in even larger increases in the price of wheat, which is already at a multi-year high as a result of the conflict, as Russia and Ukraine are both major producers of the grain. “Rising gas prices are also likely to have an impact on the price of wheat and other agricultural commodities,” Beauchamp says, noting that fertilizer costs are already rising. Beyond the war, Teucrium says on its website, global population growth and the expansion of the middle class are also boosting demand for wheat.
Teucrium Corn ETF (CORN)
With Ukrainian ports closed for commercial shipping, corn exports have also been disrupted, helping push prices higher along with those for wheat. Corn isn’t just used for food for people. It’s also key for raising cattle. It is used throughout the global economy in ethanol fermentation, starch and sweetener production as well, and increasingly in plant-based plastics manufacturing by companies looking to build more sustainable operations. Teucrium says the grain has a historically low correlation with U.S. stocks and can potentially improve portfolio diversification.
Aberdeen Bloomberg Industrial Metals Strategy K-1 Free ETF (BCIM)
Prices for industrial metals aluminum, nickel and copper have also been on the rise because of the Russia-Ukraine conflict. Russia is a significant supplier of those metals. Investors can get exposure to all of them, as well as zinc, through this ETF that invests in futures of each of those commodities. Beyond the conflict in Ukraine, industrial metals are key to the world’s economic expansion. Copper, for example, is widely used in wiring and piping for homes and businesses. And it will increasingly be needed amid the boom in wind and solar farms that are key to the transition from fossil fuels.
8 commodity ETFs that can give your portfolio a lift now:
— Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (BCI)
— SPDR Gold Shares (GLD)
— Aberdeen Standard Physical Palladium Shares ETF (PALL)
— United States 12 Month Oil Fund (USL)
— United States 12 Month Natural Gas Fund (UNL)
— Teucrium Wheat ETF (WEAT)
— Teucrium Corn ETF (CORN)
— Aberdeen Bloomberg Industrial Metals Strategy K-1 Free ETF (BCIM)
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