Surging food and fuel costs have turned nearly all Americans into experts on inflation. And while ETFs linked to commodities have gotten the biggest lift, there’s a strong bull case for investing in commodities beyond using them as a mere inflationary hedge.
The Consumer Price Index (CPI) booked a whopping 6.2% annual rate of inflation from October 2020 to October 2021. Based on the current trend, inflation has been running hotter and higher than it's been in decades. And it’s not hard to see why so many advisors and investors are looking for defensive hedges.
Among the major asset classes, commodities have been 2021’s best performers. The USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (SDCI) has jumped over 42% year-to-date. By comparison, ETFs linked to stocks like the Schwab US Broad Market ETF (SCHB) are ahead by 31.25%, and bonds via the iShares Core U.S. Aggregate Bond ETF (AGG) have slipped 1.45%.
While commodities have enjoyed a big resurgence after years of stagnating, the global trend toward decarbonization may push demand for certain raw goods even higher. Let’s examine a few ETF markets that could be the biggest beneficiaries.
Aluminum
The industrial metal aluminum is used for everything from soda cans to energy solar panels. It’s the metal’s reflective properties that make it a desirable component for the latter.
Research indicates that solar panel efficiency can be improved by up to 22% through the use of embedded aluminum studs. Additionally, the metal is 100% recyclable without losing its properties.
Invesco DB Base Metals Fund (DBB) holds exposure to a basket of industrial metals, which includes aluminum. The fund, with $459 million in assets, was launched in 2007 and charges annual expenses of 0.80%
Copper
The copper industry is poised for big growth in the coming years. And the shift away from gas-powered automobiles to electric vehicles (EV) is a major contributing factor.
Conventional gas-powered cars contain 18 to 49 pounds of copper, while a battery-powered EV contains 183 pounds. Moreover, global demand for refined copper is expected to rise by 31% through 2030, according to the Australian government's Department of Industry, Science, Energy and Resources.
The United States Copper Index Fund (CPER) provides exposure to copper via futures contracts on the COMEX exchange. The fund has $290 million in assets and charges 0.65% annually.
Hydrogen
Hydrogen is one of the most promising sources of clean fuel on the world’s path to net-zero emissions. Fitch Solutions, a market analyst, forecasts that green hydrogen production will rise from less than 1% of current global market supply to 10% by 2030.
Hydrogen product demand will be most concentrated in large, highly developed markets like China, Western Europe, Canada and the U.S. Fitch has identified these regions as the prime markets globally for the development of green hydrogen.