This commodities ETF may hold significant stock market indices
Commodities and stocks are two distinct asset classes, but there are times when members of the former can be instructive as to what lies ahead of the latter.
For many investors, it is difficult and understandable to determine when and which commodities will provide stock indices. This goes without saying, as many market players are under-allocated to commodities. However, the Invesco DB Commodity Index Tracking Fund (NYSEArca: DBC) not only fills the general gap in product allocation; some of its components can provide valuable information on the stock markets.
The $ 2.46 billion CAD tracks the DBIQ Optimum Yield Diversified Commodity Index excess return.
The ETF, which is just over 15 years old, “is designed for investors looking for a profitable and convenient way to invest in commodity futures. The Index is a rules-based index composed of futures contracts on 14 of the world’s most widely traded and major physical commodities ”. according to Invesco.
A deep dive on ‘DBC’
As noted above, DBC offers exposure to 14 heavily traded commodities. Its current range is undoubtedly tailor-made for an environment of economic recovery. Gasoline, West Texas Intermediate Oil and Brent Crude combine for more than 41% of DBC’s list.
Another key element is the fund’s 10% weighting in copper, an industrial metal long known to provide clues to economic activity.
“Although stocks and copper have tended to have a positive correlation over the past four decades, and particularly over the past 20 years, they behave very differently in different environments.” writes CME Group Executive Director and Senior Economist Erik Norland.
As Norland points out, copper dominated stocks in the late 1970s, when inflation was soaring. This year, conventional wisdom seems to hold that inflation will be transient, but it is coming nonetheless. Copper could perform above average in a few months.
Of course, it’s not just the United States where copper can be instructive. Investors considering emerging markets, particularly China, should consider carefully monitoring the prices of the red metal.
“Over the past 16 years, copper prices have shown a strong positive correlation with Chinese GDP,” Norland adds.
China consumes up to half of the world’s copper production on an annual basis. Another reason that the copper exposure of DBC could be beneficial is the tapered talk. If the Federal Reserve reverses quantitative easing, long-term bond yields could rise, putting pressure on equities. As Norland points out, this scenario could be positive for industrial metals.
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The opinions and predictions expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.