A Sensible Commodity ETF Pick to Diversify a Traditional Portfolio
This article was originally published on ETFTrends.com.
The escalating trade war rhetoric between the U.S. and China have dragged down global markets, but as the two countries come together to find common ground, exchange traded fund investors may be left with a potential buying opportunity to get in on the rebound.
"It's affecting Chinese economy. It's affecting the U.S. to a smaller degree - most economists think it's going to shave about a quarter of a percent off of GDP growth, but it's really having an impact on emerging market equities and it's depressed commodity prices as well. But if there's a positive change in tone, we could see prices pop once some of the pressure comes off," Kevin Baum, Chief Investment Officer for USCF Investments, said at the Charles Schwab IMPACT 2018 conference.
If we see the U.S. and China continue to take steps to mend fences and come to an agreement on trade, much of the anxiety hanging over the markets could be quickly alleviated, which would help induce a rebound from this year's trade-war selling.
"We think that industrial metals prices, agriculture prices could significantly recover - maybe 10-15 percent price recoveries - because that's what has sold off since the tariff war started," Baum added.
Baum singled out the United States Commodity Index Fund (USCI) as a prudent way for advisors to gain broad access to the commodities asset class.
USCI eschews rolling front month contracts, which can lead to underperformance, especially in a contangoed market, rebalancing each month and selecting the most-backdated contracts and then the seven highest-returning contracts.
Specifically, the commodities ETF tries to reflect the performance of the SummerHaven Dynamic Commodity Index Total Return Index, which consists of 14 commodity futures. The index is reformulated each month from 27 possible futures contracts. The 14 selected contracts are equally weighted and represent six sectors: Energy (WTI crude oil, Brent crude oil, natural gas, heating oil, gasoil, RBOB gasoline), Precious Metals (gold, silver, platinum), Industrial Metals (aluminum, copper, lead, nickel, tin, zinc), Grains (corn, soybeans, soybean meal, soybean oil, wheat), Livestock (live cattle, feeder cattle, lean hogs) and Softs (coffee, cocoa, cotton and sugar).
The portfolio currently consists of the following futures contracts: Gas Oil JAN 19, Live Cattle APR19, Zinc JAN18, Heating Oil APR19, Corn DEC19, Gold FEB19, Unleaded Gasoline (RBOB) FEB19, Wheat MAR19, Cocoa MAR19, Natural Gas MAY19, Copper NOV19, Cotton MAR19, Feeder Cattle JAN19 and Aluminum JAN19.
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