Hard Asset Exposure How-to

Investing in commodities has emerged as a popular call for 2022. High rates of inflation, shifts in China's economy and consumption patterns, and the transition from fossil fuels to renewable energy all have implications for commodities prices in the coming year and potentially beyond. But for many investors, gaining exposure to the price of copper, corn, or even oil is more challenging than just adding another stock or exchange-traded fund to their portfolio.

Barron's Reshma Kapadia took on the topic in last weekend's funds quarterly. She recommends three actively managed funds for commodities exposure. Read about those here.

There are several points in favor of investors diversifying into commodities in 2022. Reshma writes:

Investors wanting to hedge against inflation, which makes stocks more volatile, have long turned to commodities. It’s a broad “if- you-can’t-beat-’em, join-’em” strategy: If inflation is rising, the prices of commodities are typically rising, as well, so part of your portfolio will benefit even as some investment returns are muted. Energy futures have the best correlation with U.S. inflation, but over the long term, agriculture, livestock, and industrial metals are all positively correlated. Since 2000, the Bloomberg Commodity Index’s monthly year-over-year returns have had a 76% correlation with U.S. consumer-price-index data, according to J.P. Morgan.

There's also a projected increase in demand for several of the metals needed for the green energy transition in the coming years. Those include copper needed for wiring in all things digital; lithium, used in batteries; and aluminum, used to build lighter vehicles plus solar panels and wind turbines. In the meantime, we'll still need fossil fuels like coal, oil, and natural gas. But there's little appetite for investing in new production today, meaning supply should remain tight and prices high.

China's crackdown on its debt-laden property sector, on the other hand, could dampen demand for metals used in construction. Higher fuel costs and more frequent weather-related disruptions due to climate change mean upside pressure on agricultural commodities prices.

Reshma has much, much more on the outlook for numerous classes of commodities and the forces to watch in last weekend's cover story.