Inflation is back and so are commodities. Almost every commodity group, including oil and gas, precious metals, and agriculture are outperforming the S&P 500 index in 2024.
Exchange-traded funds offer investors exposure to commodities without having to take physical possession of the underlying asset. So, if investors want a convenient means of tracking the price of a commodity like oil or gold, they can buy an ETF that tracks the prices of those assets, or they may also buy commodity ETFs that offer broad market exposure across multiple commodities.
We take a fresh look at inflation in 2024, as well as the top commodities ETFs for inflation.
What Is a Commodity ETF?
A commodity ETF is a type of exchange-traded fund that provides exposure to one or more commodities, which are raw materials or primary agricultural products that can be bought and sold. These ETFs allow investors to gain exposure to the price movements of commodities without having to own the physical assets themselves.
Commodity ETFs can track the price of individual commodities or a basket of commodities, offering diversification and potentially serving as a hedge against inflation or currency fluctuations. ETFs may track the price of commodities, such as oil, gold or silver, by holding the physical commodities directly.
Alternatively, these ETFs may track a commodity benchmark asset’s price indirectly by using derivatives, such as futures or options contracts. Some commodity ETFs are equity-based, which means they invest in companies involved in natural resources or the mining industry.
Do Commodity ETFs Hedge Against Inflation?
Commodity ETFs are often considered by some investors as a potential hedge against inflation, but the effectiveness of this hedge can vary depending on several factors. While commodities have historically exhibited a positive correlation with inflation, there are nuances to consider.
Here's what to know about commodity ETFs and inflation:
Inflation Outlook for 2024
As of March 20, the Federal Reserve's 2024 forecast for inflation was 2.4% with its first interest rate projected for June, but after the March Consumer Price Index (CPI) report delivered a third consecutive month of rising inflation, the bond market began pricing in inflation and rates to remain higher for longer.
The CME Fed Watch tool is predicting the first rate cut to come in September.
Remember, commodity markets are complex and influenced by numerous factors. These are just general forecasts, and the actual performance of any commodity can deviate from expectations.
Is Stagflation a Looming Threat?
There is no consensus among economists on whether stagflation is a looming threat. Some economists believe that the current economic conditions are not conducive to stagflation, while others believe that the risk of stagflation is increasing. Stagflation is a situation in which the economy is experiencing both high inflation and slow economic growth.
Stagflation can be a difficult situation to deal with, as it can lead to a number of negative consequences, such as rising unemployment, falling wages and a decline in living standards.
How to Hedge Against Stagflation
A diversified investment portfolio can help mitigate the impact of stagflation. A mix of asset classes, including stocks, bonds, commodities and alternative investments, may provide better protection against various economic scenarios. Investments that can help to hedge against stagflation include Treasury inflation-protected securities (TIPS) , commodities and real estate.
Other investments that tend to perform relatively well during periods of stagflation include dividend-paying stocks, cash and short-term bonds, and defensive sectors, such as utilities, healthcare and consumer staples.
10 Best Commodity ETFs by 2024 Performance
|
Ticker |
Fund |
AUM |
Expense Ratio |
YTD Return |
|
PDBA |
Invesco Agriculture Commodity Strat No K-1 ETF |
$30.8M |
0.59% |
24.22% |
|
DBA |
Invesco DB Agriculture |
$836.3M |
0.85% |
23.72% |
|
USO |
United States Oil |
$1.4B |
0.60% |
22.51% |
|
BNO |
United States Brent Oil |
$134.1M |
1.00% |
21.68% |
|
SIVR |
abrdn Physical Silver Shares ETF |
$1.3B |
0.30% |
21.39% |
|
SLV |
iShares Silver Trust |
$12.1B |
0.50% |
21.26% |
|
UGA |
United States Gasoline |
$129.2M |
0.97% |
20.20% |
|
OILK |
ProShares K-1 Free Crude Oil Strategy |
$146.4M |
0.71% |
18.39% |
|
USL |
United States 12 Month Oil |
$66.2M |
0.85% |
17.89% |
|
DBP |
Invesco DB Precious Metals |
$148.6M |
0.75% |
16.20% |
Data as April 15, 2024. Leveraged funds were not considered for this list of commodity ETFs.
Bottom Line on Best Commodity ETFs for Inflation
While commodities ETFs can potentially serve as a hedge against inflation, they are not a guaranteed solution and come with their own set of risks. Historically, broad market commodities ETFs have been better inflation hedges than funds that invest in a single commodity, such as gold. Before investing in a commodity fund, investors should carefully consider their investment goals, risk tolerance and overall portfolio strategy.
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