This time of year, according to seasonal trends, is known for the September Effect -- a challenging month for equity performance -- and the return of market volatility.
Seasonality isn’t the same as certainty, but as if on cue, recent VettaFi engagement data shows that advisors have been increasingly researching commodities as an asset class, which in August ranked second only to their interest in U.S. equities.
The effort to diversify, de-risk portfolios and preserve capital is officially on.
Chart Source: The Weekly Chart Storm
It may seem somewhat counterintuitive to think of agricultural commodities as a risk diversifier from equity weakness at a time when the U.S. crop is about to go into harvest. Ample supplies mean pressured prices. And this year, that’s exactly the point.
Agricultural Commodities
According to the team at Teucrium, the ETF provider offering single ticker solutions to access individual commodities like soybeans (SOYB), corn (CORN) and wheat (WEAT), among others, U.S. farmers are about to harvest the 4th largest corn crop ever and a record-yielding soybean crop, if projections are right, meaning prices for these commodities are about to go lower.
These harvest lows should bring these commodities prices even closer to production costs, a potentially opportune time to “buy low,” Teucrium’s portfolio manager Jake Henley recently put in a research note. When prices trade near or at production costs as they are headed to now, a new commodities cycle begins where downside risk is minimal at best, he says.
Aggregate-type commodities fund like Teucrium Agricultural Fund (TAGS), which offers access to soybeans, corn, wheat and sugar futures, and the Invesco DB Agricultural Fund (DBA), which invests in at least 10 agricultural commodities, are among the catch-all strategies in this category. DBA has, in fact, outpaced the S&P 500 in returns so far in 2024.
Gold’s Shining Moment
But one commodity that’s emerging as an interesting play right now is gold. State Street Global Advisors, in its latest “Playbook to Get Ahead of the Fed,” singled out gold as one of the key investment opportunities to consider given the upcoming shift in rate policy. The note said:
“Since 1974, U.S. real rates have fallen in nearly 60% of the months when the Fed lowered its fed funds target rate. Gold has a negative correlation to real rates, producing an average monthly return of 1.0% when the fed funds rate was lowered and an average 1.6% return when real rates fell at the same time.”
Gold prices tend to go up when rates fall. That inverse correlation, while not bullet-proof, could make gold an interesting commodity with which to de-risk going into a lower rate cycle - one that some market experts say may be coming too late as economic weakness and macro uncertainty sips in.
The SPDR Gold Trust (GLD) and its mini-me counterpart, the SPDR Gold Minishares Trust (GLDM) have seen nearly $2 billion in combined net inflows in the past month. Since the beginning of the quarter, almost $3.5 billion have gone into these two gold ETFs alone. And while GLD - a trader favorite - sees money come in and out regularly, GLDM, which has a more retail appeal due to its much lower fee, has seen a consistent pick up in net creations recently, facing just one single day of outflows since late May.
GLD and GLDM are just two gold ETFs in a universe of funds that includes offerings from multiple providers including iShares, VanEck, GraniteShares, Invesco, abrdn, Goldman Sachs and ProShares, to name a few. You can find a complete list here.
2 Other Unique Ways to Access Gold
These popular physical trusts aren’t the only way to access the yellow metal. Product development in recent years has turned out some interesting portfolios tapping into gold plus something else. Consider two approaches:
- Gold plus income.
Gold is typically an asset that doesn’t generate yield, but there are ETFs that deliver yield on a gold position through options.
The USCF Gold Strategy Plus Income Fund (USG) offers exposure to the price of gold through an actively managed portfolio that taps into both futures and physical gold, while it generates income through call options, distributed quarterly. USG is up almost 9% year-to-date, and has a 30-day SEC yield of 4.4%, or trailing 12-month yield of 6.5%, according to USCF data.
2. Gold plus downside protection.
The popular “buffer” ETF experience is available to gold bugs too.
The FT Vest Gold Strategy Quarterly Buffer ETF (BGLD) offers access to the performance of GLD (as the underlying gold exposure) but with a predetermined range consisting of an upside cap and downside buffer. Reset on August 30, that range has an upside capture of up to 8.7% and downside protection between -5% and -15%, according to First Trust data. Year-to-date, BGLD is up nearly 13%.
Why Gold Now
Year-to-date, GLD - the ETF proxy for the gold market - is up more than 20%, outpacing both the S&P 500 and the Nasdaq 100.
If market calls for diversification grow louder and concerns about weakening economic conditions mount, gold prices could continue to find support as a traditional safety play in times of uncertainty, especially as the Federal Reserve tinkers with interest rates this fall.
For more news, information, and analysis, visit VettaFi | ETFTrends.
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