When it comes to commodities, unlike stocks and bonds, there really is no universal agreement on whether they belong in a portfolio. The hot-and-cold nature of the asset class can be tough for advisors and investors to endure.
And there are the further decisions on how to just get commodity exposure—broad based or single-commodity, physically backed or equity-related.
This year the nut continues to be difficult to crack. Every single broad-market commodity ETF is down in the year-to-date period through July. Losses range from less than 1% for the ETRACS UBS Bloomberg Constant Maturity Commodity Index TR ETN (UCI) to 9.5% for the GS Connect S&P GSCI Enhanced Commodity TR Strategy ETN (GSC).
In many cases, individual commodities are doing even worse than the broad indices suggest. The most widely followed commodity in the world, crude oil, is down about 6.6% through the end of July, fueling a 12.3% loss for the United States Oil Fund (USO).
Improvement Since Bloodbath
All that said, this isn’t a story about how poorly commodities are doing. That’s because they aren’t doing all that bad―at least compared with the bloodbath in 2014 and 2015.
Commodities need to be looked at in the context of cycles, and if 2016 was a year of across-the-board recovery from extremely oversold levels, 2017 is shaping up to be a year of moderation, with traders being more discerning about which commodities to buy and sell.
Even though many commodities have pulled back this year, plenty have climbed higher. Those are the commodities we’ll highlight here.
Palladium At 16-Year High
At the top of the heap is a precious metal that’s used primarily as an autocatalyst in gasoline vehicles―palladium. The ETFS Physical Palladium Shares (PALL), with its 31% gain for the year, is far and away the top-performing commodity ETF of the year.
Earlier this summer, palladium prices reached as high as $917/oz, the richest price since 2001. Sister-metal platinum now trades at a mere $50 premium to palladium, compared with an average premium of $775 over the past decade.
After palladium, the next-best-performing commodity is another metal―copper, which hit a two-year high at the end of July. Exchange-traded products such as the iPath Pure Beta Copper ETN (CUPM), the iPath Bloomberg Copper Subindex Total Return ETN (JJC) and the United States Copper Index Fund (CPER) gained between 13.5% and 14.5% this year.
Powering copper’s ascent has been a potential ban by China on imports of scrap metal, scrap wire and scrap motor starting in 2018. China hopes the move will reduce pollution, but it would also decrease the supply of scrap copper in the country.
Gold Still In Demand
Rounding out the list of the 10 top-performing commodities is an investor favorite, gold. There are three gold ETFs tied to the yellow metal on the list, including the iShares Gold Trust (IAU), the ETFS Physical Swiss Gold Shares (SGOL) and the SPDR Gold Trust (GLD), each with gains of just over 10%.
Gold prices remain supported by persistently low global bond yields, which reduce the opportunity cost of holding the metal, which is widely regarded as a safe haven. Investors continued to add to their gold ETF holdings, with 109.1 metric tons coming into the space during Q1, according to the World Gold Council.
At the same time, central banks added 76.3 metric tons to their stockpiles. Both figures are down from last year, but suggest there’s still a healthy demand for gold from all segments of the market, despite surging stock markets around the world.
For a full list of this year’s top-performing commodity ETFs, see the table below:
Drew Voros can be reached at email@example.com.
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