Weak Dollar, Inflation Stir Optimism For Commodities ETFs
The PowerShares DB Commodity Index Tracking Fund (NYSE:DBC) has retreated a bit in recent days as the downtrodden dollar has caught on the flight from riskier assets. Still, it is not a stretch to say commodities could see more tailwinds than headwinds in 2018.
Predictably, the weak dollar is widely cited as a catalyst for stronger commodities prices, a scenario that can matriculate down to exchange traded funds like DBC. After all, commodities are denominated in dollars. Although it has risen over the past week, the PowerShares DB US Dollar Bullish ETF (NYSE:UUP), the ETF proxy for the U.S. Dollar Index, is down 2.5 percent year-to-date after sliding 9.1 percent in 2017.
On the other hand, the $2.61-billion DBC has jumped nearly 13 percent over the past six months. DBC tracks an index “composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world,” according to PowerShares.
All About The Dollar
Few asset classes are as positively correlated to a slumping dollar as commodities. DBC's six-month returns prove as much.
“A weak U.S. dollar can also provide a tailwind to commodities. This is because most major commodities are priced in U.S. dollars,” PowerShares said in a recent note. “When the dollar falls in a broad fashion against other currencies around the world, commodities tend to rise in U.S. dollar terms. And because the borrowings of many emerging market countries are also denominated in U.S. dollars, a weak dollar can reduce the debt burden of these economies.”
A weak dollar also benefits U.S. exporters, and the U.S. is solidifying its status as net oil exporter. In November, U.S. oil production topped 10 million barrels per day for the first time since 1970. The difference between then and now is that U.S. oil output is moving higher, not declining as it was in 1970. By some estimates, the U.S. could soon surpass Saudi Arabia and Russia for top honors among the world's largest oil producers.
Rising Inflation Is Good For Commodities
U.S. inflation is expected to move higher this year and the same is true of many other major developed economies. That could be another catalyst for commodities, an asset class often favored for its inflation-fighting potential.
“Over the past 15 years, commodities have experienced a more than 0.80 correlation to changes in the CPI — higher than U.S. and other developed-market equities, REITs and even Treasury Inflation-Protected Securities,” said PowerShares.
Over the past 90 days, investors have added $239.4 million to DBC, good for the third-best total among all PowerShares ETFs.
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