Why Investors May Want To Think About Adding Commodities To Their Portfolios

Why Investors May Want To Think About Adding Commodities To Their Portfolios

Posted On July 24, 2023 11:26 am

Recent reports such as the Consumer Price Index (CPI) and wages have shown inflation coming under control but these data points come with a lag and measure end point prices. If you look at the source or input prices you’ll see things are not so subdued.

Using raw commodity prices as a gauge it looks like inflation embers are still glowing and have the potential to flare higher in coming months.

Indeed one of the factors causing a spike in some commodity prices, especially within the agricultural sector, is the global heatwave. It is stressing crops in terms of both yield and the ability to harvest and transport.

According to recent agricultural reports from the USDA 57% of the domestic corn crop and 51% of soybeans are dealing with drought conditions. These conditions are expected to worsen as El Niño develops, a climate pattern that can bring drier and hotter weather to the Midwest.

Other issues facing agricultural commodities include the ongoing war in Ukraine in which Russia recently stated it will stop exporting wheat which caused the price of wheat futures to spike some 10% in a single day hitting a “limit up” trading halt.

So while everyone has become re-enamored with stocks, especially the big cap tech names, don’t overlook the importance of diversifying portfolio with some exposure to commodities.

But what may be bad news for your grocery bill could be good news for your portfolio.

Historically commodities have low correlations to equities and the recent relative underperformance suggests this could be a good time to consider adding agriculture to a diversified strategy.

Let’s go to Magnifi to research ETFs, which provide exposure to commodities.

The Invesco DB Agriculture Fund (DBA) is a great way for investors the to invest in a basket of commodity futures without having to open a commodity account or manage their own positions.The fund holds the major agricultural commodities, including corn, soybeans, wheat, sugar, cocoa, coffee, cotton, live cattle along with a nice weighting of US Treasury securities for interest income.

Those top six commodities comprise 60% with 40% concentrated in the grains sector. The fund rebalanced annually in November with an expense fee is 0.85%.

Soft commodities were the best-performing sector of the commodities market in Q1 2023, with cocoa and sugar reaching 10-year highs. This propelled DBA shares from a low of…

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.