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Commodities ETF

Invest in the Energy Transition and Hedge Against Inflation

Discover VanEck’s Commodities ETF Suite

Commodities represent an important and varied alternative asset class whose relevance is often overlooked when building a resilient portfolio. Not only do they have historical inflation hedging characteristics, but also demand is expected to increase due to the energy transition. Clearly future developments are uncertain and need to be closely monitored.

Why Consider a Commodities ETF?

ETFs have many interesting characteristics and features. They are financial instruments known for being relatively low cost with transparent investment strategies and holdings, which are published daily. Moreover, ETFs are deemed to be very liquid as they are traded like normal shares during market opening times.

Commodities ETFs by VanEck can be an attractive alternative to investing directly in commodities. This is for four main reasons:

Commodity companies’ equities tend to pay out dividends. In fact, in many cases these companies regularly distribute part of their profits to shareholders in the form of dividends or share buybacks. Thus, investors looking for regular income could opt for a Commodities ETF rather than investing directly in the commodity itself. Of course, past distributions do not guarantee that dividends will also be paid in future.

ETFs are naturally diversified, effectively being funds that invest in the shares of multiple companies. Usually they cap the allocation to individual securities or countries, which can limit idiosyncratic risks. Naturally investors need to pay attention to sector risk and concentration risk.

Typically, investors buy commodities directly through derivatives like future contracts. These are agreements to buy or sell a specific commodity at a certain price and date in the future. But buying futures requires an investor to be pretty experienced, as it is more complicated than simply buying a Commodities ETF managed by a team of professionals. There could also be tax nuances associated with a direct investment.

In some cases, commodity companies’ equities effectively result in leveraged exposure to the underlying commodities. That means they tend to amplify the commodities’ price movements, during both upwards and downwards markets. In fact, commodity equities often have a moderately high beta, which produces the effect just described.

Why Include a Commodities ETF in a Portfolio?

Commodities are raw materials and tangible assets used as inputs to create products consumers buy. They can be classified in different groups ranging from agricultural products (wheat, corn, soybeans…), energy (oil, gas…), metals (gold, silver, steel…) and livestock. While derivative contracts - like futures - represent a way to invest in them, investors can also get exposure through the companies involved in their extraction, processing or refinery, depending on the specific kind of commodity.

There are several reasons why investors could consider allocating to one of the Commodities ETFs by VanEck:

Commodities’ Relevance in Large-Scale Trends

Commodities will play an important role in major trends that are unfolding and will shape our society. This growing importance also favors an investment in a Commodities ETF by VanEck.

Many metals and rare earth elements are vital for the energy transition. For example, they are being deployed in clean energy equipment for solar and wind as well as several parts of electric vehicles (EVs), including batteries. As governments around the world align to meet the ambitious Paris agreement’s goals, energy transition-related demand is forecast to increase. Metals for green technologies include lithium for EVs, manganese for wind turbines, hydrogen and geothermal plants as well as cobalt for energy storage and carbon capture. Clearly, there is still uncertainty concerning the way the energy transition will take place.

The growing need for infrastructure, especially in emerging markets, will require large quantities of inputs. Industrial and precious metals alike will play a significant part. This is one of the arguments for investing in a Commodities ETF.

At the same time, many metals and rare earth elements are crucial inputs for most commonly used digital devices and new technologies. They are, consequently, at the center of the competition between western nations and China. Economic blocs like the US and EU are trying to gradually gain independent supplies of these commodities, which will require substantial investment and cooperation. The two accelerating trends of digitalization and AI could likely boost demand for these metals.

Energy-related commodities have come under the spotlight as 2022’s geopolitical turmoil forced many western nations to rethink their energy supplies. Traditional fossil fuels like oil and gas will help to safeguard energy security and independence, and potentially support the shift to greener energy sources. They will also be able to sustain the electricity grid when renewable energies alone are not sufficient. What’s more, nuclear is gaining acceptance as a source of low carbon and reliable energy, with governments investing again in it. Uranium is expected to benefit from this evolution.

Digitalization and AI
Energy Security and Independence
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