Commodities Return to the Old Normal
May 09, 2022
Read Time 4 MIN
Commodities Flourish Amidst Inflation and Foreign Conflict
Returns for commodity index products in the first quarter of 2022 were the best on record according to Ned Davis Research (NDR). Continued inflation pressures from excessive U.S. fiscal and monetary policy responses to the 2020 COVID crisis supported commodity markets early in the first quarter. Russia’s military invasion of Ukraine drove commodity prices even higher and, at times, panic buying pushed several commodities to unsustainable levels of volatility and price. West Texas Intermediate (WTI) crude oil traded as high as $130 per barrel before settling down closer to the $100 level by quarter end. Wheat traded around all-time highs of $13.50 per bushel before settling back down to the $11.00 level. Nickel traded 250% higher in a single day, forcing the London Metals Exchange (LME) to close the market for over a week.
Extended War Time May Strain Already Struggling Economies
Ukraine and Russia, together, represent a veritable commodity superstore, providing critical commodities to the world. The longer their conflict lasts, the more dangerous global commodity supply shortages will likely become. Europe, for example, will likely be in critically short supply of crude oil, natural gas and refined products like diesel fuel if this conflict lasts through the summer. Industrial metals like nickel and aluminum will also likely be in very short supply. Perhaps most importantly, shortages in wheat and corn used to feed northern Africa and the Middle East could, in some cases, lead to extreme hunger in poorer countries.
|Average Annual Total Returns (%) as of March 31, 2022|
|1 Mo†||1 Yr||5 Year||10 Year|
|Class A: NAV (Incept (12/31/10)||8.48||47.42||11.11||0.26|
|Class A: Maximum 5.75% load||2.24||38.94||9.80||-0.33|
|UBS Bloomberg CMCI Index||8.69||49.74||12.64||1.67|
|Average Annual Total Returns (%) as of December 31, 2021|
|1 Mo†||1 Yr||5 Year||10 Year|
|Class A: NAV (Incept (12/31/10)||5.55||32.96||6.58||-1.22|
|Class A: Maximum 5.75% load||-0.52||25.31||5.33||-1.81|
|UBS Bloomberg CMCI Index||5.68||34.88||8.02||0.16|
The performance data quoted represents past performance. Past performance is not a guarantee of future results. Performance may be lower or higher than performance data quoted.
The "Net Asset Value" (NAV) of a Fund is determined at the close of each business day, and represents the dollar value of one share of the fund; it is calculated by taking the total assets of the fund, subtracting total liabilities, and dividing by the total number of shares outstanding. Investors should not expect to buy or sell shares at NAV.
†Monthly returns are not annualized.
Expenses: Class A: Gross 1.41%; Net 0.95%. Expenses are capped contractually until 05/01/22 at 0.95% for Class A. Caps exclude acquired fund fees and expenses, interest, trading, dividends, and interest payments of securities sold short, taxes and extraordinary expenses.
Energy Sector Rallied Strong
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) ended the quarter up over 22%, but did lag the Bloomberg Commodity Index (BCOM), which ended the quarter up around 25%. The energy sector led all sectors and BCOM’s higher energy allocation accounted for most of that index’s outperformance. Over time, we believe CMCI’s higher allocation to the industrial metals sector will benefit performance relative to BCOM. The rally in the traditional energy sector (i.e., oil and gas) has reached levels which could limit demand moving forward and the transition to renewable energy appears poised to drive industrial metals prices much higher over the longer term.
Index Sector Weightings
Source: VanEck, Bloomberg, Data as of March 31, 2022.
Backwardation: Return of the Old Norm?
Roll yields – an important aspect when analyzing commodity index returns – became positive across the commodity complex for the first time in 15 years during the quarter. CMCI generated a roll yield of 2.3% in Q1 outperforming BCOM’s 0.8% roll yield.
Source: VanEck, Bloomberg, Data as of March 31, 2022.
CMCI’s 26% sector allocation to Industrial Metals versus BCOM’s 15% could have been the significant contributor to the roll yield outperformance. Since CMCI’s inception, (evident in the periods of persistent contango) it has outperformed BCOM and the S&P GSCI Index.
It has been such a long time since this has occurred that it has almost seemed normal for futures curves to be positively sloping or in contango. Oddly enough, back in the 1980’s, a downward sloping futures curve, or backwardation, was really the only shape considered “normal”. Calculation of storage costs was easy and forward prices were discounted, so there was not much of anything else to consider. Financial leverage was a new concept then, too.
We believe we have returned to the “old normal”. We expect to see commodities in critically short supply for several years with hoarding likely.
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) is a total return rules-based composite benchmark index diversified across commodity components from within specific sectors.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Past performance is no guarantee of future results.
BCOM provides broad-based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro-economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.
The S&P GSCI serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange.
UBS and Bloomberg own or exclusively license, solely or jointly as agreed between them, all proprietary rights with respect to the Index. In no way do UBS or Bloomberg sponsor or endorse, nor are they otherwise involved in the issuance and offering of the Fund, nor do either of them make any representation or warranty, express or implied, to the holders of the Fund or any member of the public regarding the advisability of investing in the Fund or commodities generally or in futures particularly, or as to results to be obtained from the use of the Index or from the Fund.
You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity such as weather, disease, embargoes or political or regulatory developments. The value of a commodity-linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. The Fund is subject to the risks associated with its investments in commodity-linked derivatives, risks of investing in wholly owned subsidiary, risk of tracking error, risks of aggressive investment techniques, leverage risk, derivatives risks, counterparty risks, non-diversification risk, credit risk, concentration risk and market risk. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation risk, liquidity risk, interest-rate risk, market risk, credit risk, valuation risk and tax risk. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by the Fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity-linked derivative instruments may subject the fund to greater volatility than investment in traditional securities. For a description of these and other risk considerations, please refer to the Fund’s prospectuses, which should be read carefully before you invest. The Fund offers investors exposure to the broad commodity markets, currently by investing in commodity-linked swaps.
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