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Where should you invest to make money in inflationary times?

One of the traditional answers is commodities. Prices of raw materials, agricultural products and metals typically increase as the cost of living rises. This translates into higher profits for producers, which in turn pushes their share prices higher.

The energy sector is an obvious example. Almost every oil and gas company has seen its stock price move sharply higher in the past 12 months. The S&P/TSX Capped Energy Index is up about 45 per cent year-to-date. Tourmaline Oil Corp., Canada’s largest natural gas producer, has gained almost 85 per cent.

Agriculture products have generally fared well, although there has been some weakness recently. Wheat had been moving steadily higher since 2019, and the war in Ukraine triggered a new upward push. According to data published on Macrotrends, wheat approached US$12 a bushel last May before pulling back to the US$9.25 range. That’s still about 20 per cent higher than a year ago at this time.

Soybeans, another agricultural staple, traded at near-historical highs in June, although, like wheat, the price has retreated recently.

In fact, apart from oil and gas, many key commodities have been trending lower recently, spooked by recessionary fears that are beginning to outweigh supply worries.

Look at copper, which is considered to be a bellwether metal. Its price fell from US$4.60 a pound in early June to US$3.46 a pound as of Oct. 21. Freeport-McMorRan Inc., one of the world’s largest copper producers, saw its share price drop 38 per cent between late March and now.

Clearly, in the commodities world a rising inflationary tide hasn’t lifted all boats. And with inflation seemingly starting to ease, the weakness may continue.

Despite the recent pullback, some investors are convinced we are entering a sustained period of increasing demand for raw materials – what is known as a commodities supercycle. The two main drivers are corporate and government underinvestment on the supply side and an upsurge in demand.

If you buy into this, where should you invest? Horizons offers a suite of commodity-based leveraged ETFs, but they’re only for day traders with strong stomachs and a willingness to gamble. For example, the company’s BetaPro Natural Gas Leveraged Daily Bull ETF (HNU-T) was showing a year-to-date gain of 122.4 per cent as of Sept. 30. The bear version of the same fund was showing a loss of 93.9 per cent in the same period. The profits are great if you guess right. If you’re wrong, you may lose the house. Not many investors want to take on that level of risk.

There are very few broadly based commodity mutual funds or ETFs in Canada. By contrast, the United States has several, including the iShares S&P GSCI Commodity-Indexed Trust (GSG-A). It invests in a portfolio of commodity futures contracts covering everything from agriculture to precious metals. It’s ahead about 27 per cent this year, but that’s only because almost 63 per cent of the portfolio is exposed to energy. Another 18 per cent is in agriculture. Only 19 per cent of the portfolio is in industrial metals, precious metals and livestock. Had you invested in this ETF when it was launched in 2006, you would have lost an average of 5.2 per cent a year.

Another major U.S.-based commodities ETF is the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC-Q). It’s up about 15.5 per cent year-to-date. The average annual return since inception in 2014 is 1.6 per cent. Again, not impressive.

CI Investments hopes to do better with its new CI Auspice Broad Commodity ETF (CCOM-T), which was launched last month. It uses a strategy that attempts to capture upward trends in the commodity markets while minimizing risk during downtrends by tactically tracking a diversified portfolio of 12 different commodity futures contracts. They include gasoline, heating oil, natural gas, crude oil, wheat, cotton, corn, soybeans, sugar, silver, copper, and gold. The ETF is hedged to the Canadian dollar.

Right now, the fund is only long natural gas. Most of the assets are invested in the money market (the current yield is about 3 per cent), so the managers have a virtually clean slate to build the portfolio.

Surprisingly, given the history of commodity funds south of the border, CI rates this ETF as low to medium risk. That may be the case right now – with most of the assets in cash, the unit price hasn’t budged much from its initial $20 cost (it closed Wednesday at $19.98). Once the portfolio is built out, the risk level will almost certainly rise.

Readers who are interested in a Canadian fund that covers a broad range of commodities may want to take a look. But I wouldn’t advise investing until we have a clearer picture of the portfolio structure. I’d also like some performance history, although we can take some guidance from the fact that sub-advisor Auspice has a U.S.-listed ETF with the same mandate. It shows a 5-year average annual compound rate of return of 8.99 per cent.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 22/02/24 9:33am EST.

SymbolName% changeLast
Betapro Nat Gas 2X Daily Bull ETF
S&P GSCI Commodity-Indexed Ishares ETF
Optimum Yield Diversified Commodity Strategy
CI Auspice Broad Commodity ETF

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