The economic conditions that sparked a commodities boom have long passed, but things may be looking up. In fact, Goldman Sachs recently argued that the case for owning commodities has “rarely been stronger” than it is now.
Commodities encompass a broad spectrum of the global economy, including crude oil, agricultural output and metals. As an asset class they have lagged because of a slow, post-recession economic recovery characterized by low interest rates, says Michael Cooke, senior vice-president and head of exchange-traded funds at Mackenzie Financial Corp. in Toronto.
But the outlook for commodities could be improving. “Typically, commodity price improvement is correlated with the late stages of an economic cycle, and the thinking in some circles is that we are maybe just now transitioning into that environment,” Mr. Cooke says.
Gold bars in Vienna in 2016. The Horizons Gold Yield ETF is tied to the price of gold bullion, but it also contains an active component whereby investment professionals add value.Leonhard Foeger/Reuters
We asked experts to recommend commodity-based exchange-traded funds (ETFs) that they think might perform well in 2018.
Tyler Mordy, president and chief investment officer, Forstrong Global Asset Management Inc., Toronto
The pick: iShares MSCI Global Metals & Mining Producers ETF (PICK-NYSE)
This ETF can be used to take advantage of a possible short-term surge in commodity prices, says Mr. Mordy. It excludes companies that derive a majority of their revenue from gold or silver mining, whose stock prices often correlate to geopolitical and financial market volatility. Rather, this ETF primarily tracks companies focused on base metals, where demand is industry-driven, which has a positive correlation to global recovery.
A tilt toward base metals is good because they are used in construction and manufacturing, Mr. Mordy says. These metals have a tailwind in the form of a global cyclical upturn in both emerging and developed markets.
One concern is that this index is weighted toward larger companies, which poses a concentration risk that could affect performance, Mr. Mordy warns. The largest risk is tighter financial conditions as inflation perks up. However, nearly every central bank in the world is committed to a gradual approach in tightening monetary policy, he says.
The pick: PowerShares DB Base Metals Fund ETF (DBB-NYSE)
This fund tracks futures contracts on three equally weighted base metals – aluminum, copper and zinc. As such this is a popular ETF for gaining exposure to a global recovery that is increasingly seen by experts as strong, synchronous and sustainable.
Moreover, the fund could act as a hedge against trade wars, Mr. Mordy notes. “The U.S.’s foray into protectionism will almost certainly be a Pyrrhic victory. In a globalized world defined by a move toward closer interconnectedness, the biggest loser would be the U.S. Moreover, higher prices would result for many input costs, not least for industrial metals,” he predicts.
Graeme Egan, head of CastleBay Wealth Management Inc., a portfolio manager and fee-only financial planning company in Vancouver
The pick: Horizons Natural Gas ETF (HUN-TSX)
This ETF is passive in that it tracks the futures price of natural gas. Mr. Egan notes that although prices have depreciated considerably over the past 10 years, they could be bottoming out. As a result, 2018 could see higher prices due to reduced supply, increased global demand and improved global economic conditions.
“Commodities are often cyclical in nature, and given natural gas has been in the doldrums for a while, this may be a good time to include natural gas as a pure commodity play as part of an overall diversified portfolio,” he says.
The pick: Horizons Gold Yield ETF (HGY-TSX)
This ETF is tied to the price of gold bullion, but it also contains an active component whereby investment professionals add value, says Mr. Egan.
A team of portfolio managers for this ETF regularly writes covered-call options on up to one-third of the value of the ETF, and they sell options to outside investors for a premium fee. The ETF earns income/fees from this activity, which it pays out to investors, after deducting the management expense ratio (MER). The annual yield after fees for this ETF is around 4.5 per cent, he says. The availability of an ongoing cash yield or return paid to investors for a gold bullion ETF is unique, says Mr. Egan.
Gold often appreciates in value in anticipation of inflation, he says, thus this ETF could also act as a hedge against inflation.