Why It’s Time to Explore the Stocks-Commodities Dynamic

While equities are performing well, assets time to energy, agriculture and other sectors are soaring

Half way through 2014 and we hear, see, and read the financial media regurgitating the same old news; “U.S. stocks just hit a new record high!, U.S. stocks just hit a new record high!, U.S. stocks just hit a new record high!”

However, beneath the media’s typically shallow coverage, there’s another ignored but important dynamic unfolding: commodities are outperforming stocks.

The Greenhaven Continuous Commodity ETF (GCC) has gained 8.77% through the first six months of the year, while the SPDR S&P 500 (SPY) is ahead by 7.71%.

GCC is an outstanding barometer of the broader commodities market. Unlike several larger competing commodity ETFs, GCC equally weights a basket of 17 commodity futures contracts — including gold, oil, and sugar, among others. That means no single commodity dominates GCC’s performance, giving it a broader view of what’s really happening in the commodities marketplace.

Within specific commodity sectors, exchange-traded products linked to coffee contracts like the iPath Pure Beta Coffee ETN (CAFE) have soared 47.5% year-to-date (sorry, coffee aficionados).

The much-hated oil sector has experienced a nice run, too. The U.S. Oil Fund (USO) is ahead by 13.5%. Buying a Tesla isn’t the only way to hedge against higher energy prices!  

I know there’s a certain advisor demographic that purposely avoids investing in commodities via ETFs because they’re not sold on the asset class. I argue with them all the time. They tell me the investment portfolios they build are fully diversified, and I tell them any portfolio that lacks exposure to a major asset class like commodities doesn’t meet the definition of diversification, period. For whatever reason, they still believe a 60/40 stock and bond portfolio is the only diversification their clients will ever need.

At the very least, having some exposure indirectly to commodities via equity sectors tied to their performance like energy (XLE), mining companies (GDX), or basic materials makers (XLB) is another way for the nonbelievers to be converted to the faith.

While it’s true that commodities have no earnings and pay no dividends, putting them inside a portfolio of stocks and bonds acts as a true diversification mechanism. Have we already forgotten that gold was up 5% during the 2008 bear market?

Although the five-year performance of commodities relative to U.S. stocks has been deplorable, this too shall pass. In fact, the year-to-date outperformance of commodities versus stocks could already be signaling a new cycle of outperformance. Then again, if you only invest in stocks and bonds, you probably wouldn’t know that.  

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Ron DeLegge is Editor of the ETF Profit Strategy Newsletter, which uses technical and fundamental analysis along with market history and common sense to keep advisors on the right side of the market.  

 

 

 

 

 

 

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