With the US dollar expected to remain weak for an extended period of time, ETFs that track commodity classes like silver (SLV), gold (GLD), and other precious metals (DPB) have become popular and conservative investments. Increasingly it is going to be important to have exposure to commodities in a long term portfolio to help offset the almost inevitable onset of inflation.
Many consumers have felt the strain of high commodity prices in recent periods, something that has been reflected in the ETFs that track major commodities. In addition to the sectors mentioned above, Energy (DBE), US Oil (USO), and Agriculture (DBA) all have trend scores above 10%. Like gold (GLD) and silver (SLV), the price for these commodities is high when compared to historical levels but should continue trending up in the foreseeable future.
The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).
As the US dollar has continued to weaken on constant news of economic instability, investors have poured money into commodities, looking to hedge against further dollar depreciation. Among commodities, silver (SLV) leads the way with a trend score (see table for explanation) of 70.51% at 4/29/2011. Other commodities performing well in recent periods include precious metals (DBP) and energy (DBE).
In the current economic cycle, commodity investments offer the following advantages:
- With equities at inflated levels, it is likely that a retraction is in the future. Commodities show negative correlation with stocks, meaning they will likely rise as stocks begin to retreat.
- Commodity exposure can help offset the effects of inflation.
Broad-based Commodities 4/29/2011
|GreenHaven Continuous Commodity||GCC||42.08%||2.89%|
|ELEMENTS Rogers Intl Commodity||RJI||33.94%||-5.45%|
|PowerShares DC Commodity Index Tracker||DBC||31.55%||-5.17%|
|iPath DJ-UBS Commodity Index Tracker||DJP||31.49%||-5.99%|
|iShares S&P GSCI Commodity-Index||GSG||22.03%||-14.83%|
Among broad-based commodities funds, Greenhaven Continuous Commodity (GCC) has returned 42.08% in the past year and is the only ETF in the class with a positive 3-year return. Other strong performers include the iPath DJ-UBS Commodity Index Tracker (DJP), up 31.49% in the past year and ELEMENTS Rogers International Commodity (RJI), up 33.94%
With continued uncertainty in the market and the potential for higher inflation going forward, commodities offer a relatively safe investment with potential for further growth as economic instability continues to inform the decisions of many investors.
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.