Combat Inflation with Commodity ETFs

Over the last few years, we’ve seen soaring inflation and rising interest rates. The state of the market has prompted many investors to look for ways to update their portfolios. Commodities have remained one of the few investment areas that investors can turn to, to hedge against inflation and provide portfolio diversification.

What are the benefits of investing commodity?

Commodities are the raw products like oil, cotton, and gold consumed directly or used to create secondary products -- such as the gas you put in your car, the shirt you’re wearing or the wedding band on your finger. There are several benefits associated with commodity investing, including:

• Protection against inflation. Few assets benefit from rising inflation yet, historically, commodity returns have been positively correlated with high inflation – even unexpected inflation.
• Diversification. Commodities typically have a low or negative correlation to traditional asset classes such as stocks and bonds.
• Profit. Commodities are one of the more volatile asset classes as they are greatly impacted by factors including weather, geo-political events, and interest rates. Because of this level of volatility and risk, there is an opportunity for significant reward.  

Is it too late to invest in commodities?

When the pandemic hit in 2020, there was a widespread collapse in commodity prices. However, in mid-2020, commodities started to rally and have continued since. Now, some investors are wondering if they’ve missed their opportunity to participate in the current commodity cycle.

According to Auspice, CI partner and leader in commodity markets, the answer is no. Auspice believes the commodity market is in the process of presenting a generational opportunity for a commodity supercycle.   

What is a supercycle?

Commodity prices tend to go through extended periods of boom and bust – known as cycles. A supercycle is represented by an extended period (typically ten years or more) of strong and sustained demand for commodities, demand that exceeds the available supply.  

There are generally two inputs required for a commodity supercycle – an extended period of underinvestment in supply, and a demand shock. Today, we have both.

Extended period of underinvestment

Over the last decade, there’s been significant underinvestment in commodity supply as capital investments in major oil and gas mining sectors have declined. Despite the world consuming approximately 40% more in major commodities than it did 15 years ago, resource companies have continued to cut investment in new production in 2022¹. Similarly, even with elevated prices, the production of oil and natural gas continues to fall among the major supermajors.

Generational demand shock

The transition to clean energy is expected to increase demand for commodities in the coming years. The push for decarbonization and the focus on ESG (environmental, social and governance), further fueled by extremely accommodative monetary policies, has led to accelerated infrastructure spending causing a commodity demand shock.

Other important factors are also contributing to the supercycle and potentially exacerbating the cycle intensity and longevity, including:  

• The war in Ukraine
• Rising interest rates
• Supply chain complications
• Stakeholder capitalism
• Labour shortages, unionization, and aging demographics
• Re-opening of economic super-power, China
• Commodities as an inflationary hedge

All of these factors help to create an opportune market for commodity trading for some time to come.

Opportunities for investing in commodities

With high inflation and rising interest, commodities can offer portfolio protection and diversification. CI Auspice Broad Commodity ETF (CCOM) provides an easy way for investors to gain broad commodity exposure with the convenience of an ETF. The Auspice Broad Commodity ETF seeks to track the Auspice Broad Commodity Index, a rule-based index that attempts to capture upward trends in the commodity market while minimizing risk during downtrends. For more information, visit CI Auspice Broad Community ETF.

Sources: Auspice. Commodity Supercycle Update, as of September 22, 2022. 

IMPORTANT DISCLAIMERS

Commissions, management fees and expenses all may be associated with an investment in exchange-traded funds (ETFs). You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF on recognized Canadian exchanges. If the units are purchased or sold on these Canadian exchanges, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them. Please read the prospectus before investing. Important information about an exchange-traded fund is contained in its prospectus. ETFs are not guaranteed; their values change frequently, and past performance may not be repeated.

The CI Auspice Broad Commodity ETF is an alternative mutual fund. It has the ability to invest in asset classes or use investment strategies that are not permitted for conventional mutual funds. The specific strategies that differentiate this fund from conventional mutual funds include: increased use of derivatives for hedging and non-hedging purposes; increased ability to sell securities short; and the ability to borrow cash to use for investment purposes. While these strategies will be used in accordance with the fund’s investment objectives and strategies, during certain market conditions they may accelerate the pace at which your investment decreases in value.

Auspice Capital Advisors Ltd.(“Auspice”) has been licensed for use by CI. The CI Auspice Broad Commodity ETF is not sponsored, endorsed, sold or promoted by Auspice and Auspice makes no representation regarding the advisability of investing in the CI Auspice Broad Commodity ETF.

The opinion and information provided in this discussion are solely those of the speaker(s) and are not to be used or construed as personal, legal, accounting, taxation or investment advice, or as an endorsement or recommendation of any entity or security discussed or provided by CI Global Asset Management.  Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Global Asset Management and the portfolio manager believe to be reasonable assumptions, neither CI Global Asset Management nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Auspice Capital Advisors Ltd. are portfolio subadvisors to certain funds offered and managed by CI Global Asset Management.

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Published September, 27, 2022