Happy New Year! I'm unsure if I want to ring in this New Year or hang out in a bunker until 2025. Although inflation has somewhat eased in 2023, it remains well above the Federal Reserve's (FED) target rate of 2%. The central bank has maintained its benchmark federal funds rate, which influences the borrowing rates for commercial banks at nearly 5.5%. The FED vowed to fight inflation until it returned to its target rate. At its recent interest decision meeting, the FED Chairman, Powell, indicated a pause in rate hikes and insinuated possible rate cuts in 2024. It appears that the FED's plan to fight inflation did not occur in its expected timeframe.
Welcome to the 2024 election year. While the FED is supposed to be an independent branch of the government, it makes you wonder when they shift from fighting the worst inflation since the 1980s to cutting rates in an election year when inflation is still well above their target level.
Suppose the FED pivots and begins lowering rates. This will put money into the economy via more disposable income and consumer spending, increasing demand for many commodity products and services.
If the FED is forced to raise rates next year, the only reason would be that inflation is not under control. Even if the FED pauses rate hikes but does not lower rates, inflation would remain steady above the FED 2% target rate.
The ramifications of the conflict between Israel and Hamas are far from over. Ships halted travel through the Red Sea for multiple weeks, resulting in global supply chain issues. The US Navy began escorting ships through this region, temporarily relieving the market fears of supply chain disruptions. What's next? Hamas will not stop here, and they will find other ways to impact global economies negatively.
Another ongoing event is the Russian-Ukraine conflict. Commodity prices have had violent moves as a result. Fortunately, there were global bumper crops of primary grain markets this past growing season, helping to fulfill the supply void created by vessels unable to have full access to agricultural products from this region.
The commodity price surge of 2020 to 2022 retrenched slightly in 2023. But, like all extreme moves, markets must pause before making another move. Will 2024 be the year the commodity super cycle resumes?
Commodities serve as an effective hedge against inflation by providing portfolio diversification benefits. For investors, physical ownership of commodities is impractical. This is where commodity exchange-traded funds (ETFs) come into play, offering a convenient way to gain exposure to this asset class. ETFs are traded on regulated stock exchanges, offer decent liquidity, are priced per share, allow all investors to participate, and are a basket of commodities by diversifying the risk instead of a single commodity.
Here are a few ETFs that may offer a hedge against escalating inflation. Please speak with your financial advisor before investing in these products.
Invesco DB Agriculture Fund (DBA)
Source: Barchart
The DBA fund comprises the following futures markets: Coffee, Corn, Wheat, Soybeans, Cocoa, Live Cattle, Sugar, Lean Hogs, Feeder Cattle, and Cotton. The commodity is weighted in the DBA fund in the order listed. Capital is often kept in Treasury Bills and Invesco-related Government securities ETFs while awaiting future market opportunities, assisting investors' returns when commodities are not trending.
DBA has a ..85% management fee and a .08% estimated futures brokerage fee for a total fee of .93%. The fund's inception date was in 2007.
Invesco DB Commodity Index Tracking Fund (DBC)
Source: Barchart
The DBC fund comprises the following futures markets: Gasoline, Brent Crude, Heating oil, WTI Crude Oil, Gold Wheat, Corn Soybeans, Sugar, Copper, Aluminum, Natural Gas, Zinc, and Silver. The commodity is weighted in the DBC fund in the order listed. Capital is often kept in Treasury Bills and Invesco-related Government securities ETFs while awaiting future market opportunities, assisting investors' returns when commodities are not trending.
DBC has a .85% management fee and a .02% estimated futures brokerage fee for a total fee of .87%. The fund's inception date was in 2006.
iShares S&P GSCI Commodity-Indexed Trust (GSG)
Source: Barchart
The GSG fund comprises the following commodity futures market weighting: Energy 63%, Livestock 8%, Agriculture 15%, Precious metals 5%, and industrial metals 10%. Energy is a significant part of the GSG; therefore, the prices of energy futures heavily impact the GSG fund.
GSG has an annual expense ratio of .75%. The fund's inception date was in 2006.
Energy Select Sector SPDR Fund (XLE)
Source: Barchart
Unlike the prior funds built on the physical commodity, the State Street Global Advisors XLE fund is a basket of companies doing business in the energy sector, seeking to provide precise exposure to oil, gas, consumable fuel, energy equipment, and services companies. The Index aims to provide an adequate representation of the energy sector of the S&P 500 Index.
XLE has an annual expense ratio of .10%. The fund's inception date was 1998.
In closing
Investors who believe there will be another inflationary cycle ahead may consider diversifying their stock and bond portfolios with some commodity ETFs to offer a hedge against inflation.
Considering so many variables already exist and the possibility of the unknown, such as weather, election results, or any other event, it seems worthwhile to consider examining some portfolio safety for 2024.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
