Investors are pumping more money into commodity funds than at any time in the last decade, enticed by red-hot inflation and a futures market offering big profits.

Tight supplies of everything from aluminum to oil to grains have sent raw-material prices to a record, while also pushing markets into backwardation, where near-term supplies fetch a premium. That’s allowing investors to book returns by selling spot contracts and buying later-dated ones at lower prices.

Cash has flooded into commodities as fund managers seize that opportunity and seek a hedge against the fastest spike in consumer prices in decades. Citigroup Inc. estimates retail and institutional money in the sector at close to $700 billion, the most since at least 2007. That may also be further fueling the rally.

The huge inflows come as inflation and interest-rate bets roil wider markets, and mark a turnaround for index-tracking funds that proved notoriously unprofitable when the last commodities boom turned to bust in the 2010s. Back then, weaker demand and more supply saw many spot prices move into big discounts, leaving investors exposed to losses when rolling contracts forward.

Backwardation is “a huge tailwind to the investor mindset,” said Jason Bloom, head of fixed income and alternatives ETF strategy at Invesco, which has seen $1.8 billion pile into its biggest cross-commodity exchange-traded products this year. “People for the first time in 14 years have come to the idea of ‘Holy cow, inflation is a problem.’”

As an example of how appealing forward curves are, commodities like crude can offer monthly returns of more than 3% by rolling expiring positions forward by a month, even if outright prices don’t budge. Markets like aluminum, which spent most of the last decade in contango -- the opposite structure to backwardation -- are  also proving alluring to yield-hungry investors, particularly as inflation hurts returns in other assets.

That’s prompting more money to be switched into commodities, according to Ryan Issakainen, a senior vice president at First Trust Portfolios.

“The outlook has changed and the conversations we are having are ‘Let’s reconsider how this sits in a portfolio,’” he said. “Where should capital be drawn from if we’re going to make an allocation to commodities? Should it be from stocks, should it be from bonds, should it be from somewhere else?”

Commodities have also been boosted lately as the crisis over Ukraine sparks worries about potential supply disruptions. Russia is a major source of metals including aluminum and nickel, a large oil and gas producer and a heavyweight in wheat. Russia, which denied it intends to invade Ukraine, has been hit by limited initial Western sanctions after tensions escalated.

Broad-based commodity exchange-traded funds now hold more than $21 billion, the most since at least 2007, according to data compiled by Bloomberg. First Trust’s Global Tactical Commodity Fund has surged to a record $2.6 billion as it pulled in money this month.

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