By Jeff Reeves
As the crisis over Ukraine escalates, major stock-market indexes are retesting their lowest levels of the year, often after losses of more than 10%.
However, one area that has been a haven of sorts has been hard assets, including metals, fossil fuels or even agricultural goods. That’s in part because physical goods are benefiting from general inflationary pressures, but also because some investors are looking to hide out in “hard” assets right now that aren’t at risk of volatility when compared with small-cap growth stocks or cryptocurrencies.
If you’re worried the weak environment for stocks might continue in 2022, then consider looking beyond the typical large-cap stocks in the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.73% and focusing instead on these five hard-asset investments.
Commodities without the K-1
One of the most popular commodity ETFs out there, as measured by both volume and assets under management, is the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF /zigman2/quotes/207481984/composite PDBC -0.34% . And there’s good reason for that, as this commodity ETF cuts out a lot of the complexity involved with gaining exposure to this asset class.
To begin with, this ETF offers exposure to a diverse group of the world’s most heavily traded commodities. That includes aluminum, crude oil, soybeans and natural gas. Also, the “No K-1” in the name of this offering means that you won’t get the sometimes burdensome K-1 tax form issued by other commodity-related funds that have been structured as limited partnership ETFs and regulated as “commodity pools.” Not only do the taxes often run higher in these partnerships that demand K-1s, the fees often are higher, too. Consider a different Invesco fund, the Invesco DB Agriculture Fund /zigman2/quotes/204506753/composite DBA +0.19% that is benchmarked only to agricultural commodities like corn and soy. It charges 0.93% in annual fees compared with PDBC’s net expense ratio of just 0.59% — and mails you the complex K-1 form on top of that.
Obviously, you shouldn’t make investing decisions solely based on a tax form. But lower fees plus a diversified portfolio of commodities across metals, “soft” agricultural products and fossil fuels make PDBC the simplest place to start if you want exposure to this strategy. And with gains of 13% year-to-date through Tuesday while other assets remain volatile, this $6 billion ETF is certainly worth a closer look right now.
A ‘d ynamic roll’ commodity ETF
Another diversified commodity ETF worth considering if you’re worried about inflation or looking for an alternative to stocks is the iShares GSCI Commodity Dynamic Roll Strategy ETF /zigman2/quotes/208581139/composite COMT -0.83% . It’s slightly smaller, with $3 billion in assets, and like PDBC, offers simpler tax filing by avoiding a K-1, as well as a similar makeup of commodities, including energy, metals and agriculture products.
What sets this fund apart, however, is its “dynamic roll” strategy that looks to minimize some of the costs that novice commodity investors can run into in futures markets. Most commodity funds don’t own an actual stockpile of metal or fossil fuels, but instead invest in financial products such as futures contracts tied to those commodities. As those futures approach expiration, the positions must be “rolled” forward by a fund manager who closes out positions in existing contracts and then buys new contracts.
The commodity ETFs that roll on fixed, automatic schedules sometimes get punished for their timing, however, as they sell regardless of how bad the market may be and purchase longer-term contracts regardless of how expensive they are. In contrast, this ETF seeks out the maximum profit opportunity or minimum loss when it rolls.
The proof of how this dynamic strategy can serve you better is in the slight outperformance over PDBC—a nearly 15% gain year-to-date vs. that 13% gain.
The more active approach won’t always result in better returns, but is indeed paying off right now.
Run by boutique commodity shop USCF investments, the United States Oil Fund /zigman2/quotes/203483736/composite USO -1.70% has nearly $3 billion in assets under management. This fund invests primarily in West Texas Intermediate crude oil futures, with 70% of assets benchmarked to futures expiring in the next four months. Right now there’s a 20% weighting in oil futures for both April and May, 15% for both June and July, and the rest spread out through December of this year.
To be clear, futures are a derivative instrument of oil and this fund will not give you a 1-to-1 correlation with the day-to-day movement of a barrel of oil. Furthermore, there’s risk when USL rolls those futures forward.
Last but not least, you may recall a big fuss in 2020 because of a change in the fund’s methodology ; it used to load up on very near-term futures focused on just two and six weeks into the future and instead shifted to the current outlook. That really burned some smaller investors looking for easy exposure to oil, and many still are upset and skeptical of the fund as a result.