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Positioning For A Commodities Rebound With An ETF

March 7, 2018 2:32 pm
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Positioning For A Commodities Rebound With An ETF

Broadly speaking, commodities languished in February. A surprising spike in volatility sparked a rally in the U.S. dollar, which weighted on dollar-denominated commodities.

That does not mean the case for commodities has evaporated — not with the asset class trading below all-time highs while stocks remain within striking distance of new records. An exchange traded fund to consider is the WisdomTree Continuous Commodity Index Fund (NYSE:GCC), which has already reclaimed all of its February losses and then some.

GCC uses futures contracts to track the Thomson Reuters Equal Weight Continuous Commodity Total Return Index. GCC is up nearly 3 percent year-to-date and resides just pennies below its 52-week high.

Ready For A Resurgence

While equities and bonds have been soaring for multiple years now, commodities have been trailing.

From the end of 2012 through the end of 2017, “U.S. equities have moved inexorably upward, exhibiting, at least until February 2018, historically low volatility. 15.90-percent average annual returns for about five years is a strong result,” said WisdomTree. “Broad commodities, on the other hand, lost almost one-third of their value on a cumulative basis, or equivalently [a loss of] 6.5 percent per year.”

Diversified commodities exposure can benefit investors because isolating single commodities, while potentially rewarding, can mean taking on more risk and experiencing added volatility. For example, not many ordinary investors would have identified cotton and wheat as two of February's best-performing commodities at the start of the month, but GCC allocates 47 percent of its combined weight to grains and softs.

An Added Perk

Commodities often perform well as inflation moves higher and Treasury yields rise, but GCC has an added perk that levers it to the theme of rising interest rates.

“In commodity strategies that utilize futures contracts to generate their commodity exposure, one component of their returns comes from the exposure of the collateral for those contracts, typically short-term Treasuries,” said WisdomTree. “The U.S. Federal Reserve has embarked on a path of raising its policy rate, thereby raising collateral returns for commodity strategies from near-zero levels.”

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