Since then they have lost 45% (up to 30th April 2016). During the same period the FTSE All Share index rose 58%.
Source: Bloomberg as at 30th April 2016
Past performance is not a reliable indicator of future returns.
However, in recent months, the commodities market is showing growing signs of strength. Taking a contrarian view, some investors believe that commodities bottomed out in February this year and the market is beginning to resolve its oversupply problem which could lead to a sustainable recovery.
Source: Bloomberg as at 30th April 2016
Past performance is not a reliable indicator of future returns.
Reasons for Buying Commodities
Commodities are physical assets and include metals such as gold, silver and copper, oil and gas, and so-called ‘soft’ commodities such as wheat, sugar and cocoa beans.
Traditionally broad exposure to commodities has been considered a good source of portfolio diversification, as they show low correlations with equities and bonds. Also, commodities may be used as a portfolio hedge against rises in inflation.
The Thomson Reuters/ CRB Commodity Index is the standard commodities index market investors look to in order to assess the strength of the overall commodities market. Energy commodities make up 39% of the index, Agriculture – 41%, Base/Industrial Metals – 13% and Precious Metals – 7%.
Energy – Oil
The oversupply on the global oil market has continued to weight on oil prices, but the current situation is unsustainable with a large proportion of production occurring at a loss. Investors believe that supply cuts and slowly rising global demand could lead to more stable higher prices. In turn, higher oil prices should have positive implications for the entire commodity asset class, as oil is both the largest component of major commodity indexes and an important input in the production of other commodities.
Agriculture
Population growth is a key driver of demand for agricultural commodities such as sugar, corn and wheat. According to a United Nations estimate, the current world population of 7.2bn is projected to reach 8.5bn by 2030, 9.7bn by 2050 and exceed 11bn in 2100. This should certainly boost global demand for agricultural commodities.
Industrial Metals
Metals are primarily used as inputs to the construction of infrastructure and manufacturing industries. In the past decade, demand from China and other emerging markets has been a major driver for prices of copper, iron, steel and coal.
With Chinese growth slowing, industrial prices have been in a bear market since 2011, but over the past few months, their prices have been rising. Some investors argue that even with slowing demand from China, the investment case for industrial metals remains strong. As emerging economies population continues to grow, urbanise and becoming wealthier, demand for industrial metals can be expected to rise in response.
Precious Metals – Gold
Gold is an important hedge not only against inflation but also during an uncertain economic environment. While inflation continues to stay at very low levels and some Central Banks have adopted negative interest rates, some argue that this could actually send gold prices higher, as investors would prefer to hold gold relative to cash that yields negative returns.
Additionally, the risk of Brexit and uncertainty regarding US presidency candidates should make it a good diversifier and safe haven investment.
How Investors Can Gain Exposure to Commodities
| Exposure | Passive | Active |
| Broad | Lyxor Thomson Reuters/Core Commodity CRB
By tracking the Thomson Reuters/Core Commodity CRB TR index, this ETF aims to provide exposure to broadly diversified basket in commodities. |
First State Global Resources Fund
This offers investors exposure to a diversified portfolio of commodity and natural resources related equities. |
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| Energy -Oil | ETFS Brent Crude ETC (USD)*
The ETC is designed to enable investors to gain an exposure to a total return investment in Brent crude by tracking the Bloomberg Brent Crude Subindex. |
Guinness Global Energy Fund
The fund offers exposure to global energy equities across the oil, natural gas, nuclear and alternative energy sectors. |
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| Agriculture | ETFS Agriculture ETC
The ETC is designed to enable investors to gain an exposure to a total return investment in a basket of agriculture commodity futures contracts by tracking the Bloomberg Agriculture Subindex SM index. |
Sarasin Food and Agriculture Opportunities Fund
The fund will invest in a global and diversified portfolio of equities which provide exposure to the agricultural sector. |
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| Industrial Metals | ETFS Industrial Metals ETC (USD)*
The ETC is designed to provide investors with a total return exposure to industrial metals futures tracking the Bloomberg Industrials Subindex. |
First State Global Listed Infrastructure Fund
The fund invests in the shares of companies that are involved in infrastructure around the world. The infrastructure sector includes utilities, highways, airport services, marine ports and services, and oil and gas storage and transportation. |
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| Precious Metals – Gold | ETFS Physical Gold ETC
This ETC is backed by gold bullion and that provides a return equivalent to the movements in the gold spot price. |
Blackrock Gold & General Fund
The fund invests in companies involved in gold mining and aims to deliver a return in excess of the FTSE Gold Mines Index. |
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*Please note that the ETC is denominated in US dollars therefore investors can be exposed to currency risk. ETF Securities also offers this ETC with daily hedges into Sterling and it’s available through our ETF selector tool.
You can research your next ETF by using our ETF selector tool. Use geographical, Fund Provider, Morningstar rating and a host of other filters to find an ETF for you.
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Remember that each fund is unique and hence exposed to different levels of risk. Some are relatively low risk, whilst others can be very risky and those will only be appropriate for more sophisticated investors.
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