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The Key Role Of Commodity ETFs – ETF.com

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This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by John Davi, chief investment officer of Astoria Portfolio Advisors in New York City.

Commodities were not part of the QE-induced liquidity supercycle, also known as the “great beta trade” for stocks and bonds when the world’s largest central banks purchased $15 trillion of stocks and bonds over a 10-year period.

Needless to say, all that portfolio managers needed to do during the “great beta trade” was to be long stocks or bonds, and everyone looked like a hero, because one of the big three central banks was going to back up the truck and purchase a boatload of financial assets (and keep buying and buying).

Commodities, however, were not part of the “great beta trade” by central banks, so they were left in the dust.

Commodities are now very valuable, because commodities are super cheap; second, they typically outperform during latter stages of the economic cycle; and finally, they are uncorrelated to stocks and bonds.

At Astoria, our view is that inflation bottomed last year. Over the past 200 years, commodities have outperformed when inflation is rising, as shown in the chart below.

Sources: U.S. Bureau of Labor Statistics, Bloomberg. BCOM TR is the Bloomberg Commodity Index Total Returns. Annual data as of 12/31/11, data shown is most up-to-date data available.

Why Look At Commodities Now

Despite the massive underperformance in recent years, commodities serve a valuable role in a portfolio. Our outlook for 2018 in December 2017 actually placed commodities as the second-most-important theme for this year. Investors shouldn’t ignore them, and here’s why.

Commodities historically have had equitylike returns and with comparable volatility. Admittedly, these equitylike returns didn’t manifest themselves in this cycle. However, because we think commodities are the cheapest asset class around, Astoria owns physical commodities and commodity-centric equities.

For those that aren’t familiar with Astoria’s long-standing view, we have been vocal that the vast majority of the global bond market is rich, crowded and expensive. 

As the chart below shows, commodities have performed similarly to stocks from a performance and risk perspective over the past half a century. Most do not realize this because the majority of the investment community has short-sided investment views, i.e., let’s buy what’s worked recently and not take career risk.

Sources: SummerHaven Index Management, Bloomberg

Sadly, because of this behavioral bias, most portfolios are backward-looking. Markets, however, are forward-looking, which is precisely why most mutual fund managers and individual investors underperform their benchmark and investment goals.

From 1959 to 2017, the correlation of commodities to stocks has only been 1.2% and the correlation versus bonds has been -29%.

Commodity Correlations

Sources: SummerHaven Index Management, Bloomberg. Data from 7/31/1959 to 12/31/2017.


The correlation between commodities and inflation has been positive (+37%), while it has been negative for stocks (-12%) and bonds (-24%).

 Correlation to Inflation

Sources: SummerHaven Index Management, Bloomberg

Consider this stat: The current equity bull and bond market is near its 95th percentile going back more than half a century. But for commodities, we are near the 5th percentile going back more than 50 years. That is a huge difference.

Commodity Futures return is an equally weighted index of up to 27 commodity futures from the SDCI commodity universe. Commodity trading involves substantial risk of loss. Sources: SummerHaven Investment Management, Bloomberg.

ETF Application

In practical terms, Astoria’s Multi Asset Risk Strategy (MARS) has heavy exposure to commodities and inflation. The elements of positive commodity carry work well for us in conjunction with other risk premias we are currently harnessing (value, momentum, beta, etc.).

We are using ETFs like the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) for our commodity exposure. The ETF gets its exposure via the futures market. COMB provides exposure to 20 commodities across 22 futures. The largest subgroups are energy (30%), agriculture (27%), industrial metals (20%) and precious metals (15%).

As an ETF strategist, we are big believers in combining several cross-asset factors and incorporating assets that have extremely low or negative correlations to one another. Commodities play an important part in that philosophy, and in 2018, Astoria believes they will be a critical investment theme.

You can reach John Davi at [email protected] or @AstoriaAdvisors. ETF holdings are subject to change. For a list of relevant disclosures, please click here.