Best Commodities To Invest In May 2024

As savvy investors seek refuge from market turbulence and runaway inflation, commodities have emerged as a compelling investment opportunity in 2024. These tangible assets not only act as a hedge against rising prices but also offer diversification benefits, making them an attractive addition to any well-rounded portfolio.

In this comprehensive guide, we’ll explore the hottest commodity investments for May 2024, delving into stocks, exchange-traded funds (ETFs), and the factors driving their performance.

Key Takeaways

• Commodities provide a hedge against inflation and offer portfolio diversification benefits.
• Stocks and ETFs offer accessible ways to invest in commodities like energy, precious metals, and agriculture.
• China’s economic stimulus measures, property market recovery, and interest rate expectations impact the commodity outlook.
• Conduct thorough research, consider portfolio exposure, and invest for the long term when selecting commodity investments.

What are Commodity Investments?

Commodity investments are financial instruments that track the prices of physical goods like oil, gold, wheat, or cattle. These assets can take the form of commodity stocks, which represent shares of companies involved in the production, processing, or distribution of commodities, or commodity ETFs, which are baskets of securities designed to mirror the performance of a particular commodity or commodity index.

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One of the primary benefits of commodity investments is their ability to act as a hedge against inflation. As the prices of goods and services rise, the value of commodities tends to increase as well, helping to preserve the purchasing power of investors’ portfolios. Additionally, commodities can provide diversification benefits, as their performance is often driven by different factors than traditional stocks and bonds, reducing overall portfolio risk.

However, it’s important to note that commodities can be volatile, as their prices are heavily influenced by geopolitical events, weather patterns, and shifts in supply and demand dynamics. As such, it’s crucial to approach commodity investments with a long-term perspective and a well-diversified portfolio.

The Importance of Commodity Diversification

Diversification is a cornerstone of prudent investing, and commodities can play a vital role in achieving true portfolio diversification. By investing in a range of commodities across sectors like energy, precious metals, industrial metals, and agriculture, investors can reduce their exposure to the risks associated with any single commodity or sector.

Moreover, the performance of different commodity sectors is often driven by distinct factors, further enhancing the diversification benefits. For instance, while energy commodities may be influenced by geopolitical tensions and global economic growth, agricultural commodities are more heavily impacted by weather patterns and crop yields.

So carefully allocating a portion of their portfolios to a diverse range of commodity investments, investors can potentially mitigate the impact of market volatility and position themselves to capitalize on various economic trends and scenarios.

Best Commodity Stocks to Buy in May 2024

While commodity ETFs offer broad exposure to various sectors, individual commodity stocks can provide more targeted investment opportunities. Here are some of the top commodity stocks to consider in May 2024:

1. Franco-Nevada Corporation (FNV): This Canadian company is a leading gold-focused royalty and streaming company, providing investors with exposure to the precious metals sector. Despite a challenging year for gold prices in 2023, FNV’s diversified portfolio and strong financials position it for potential upside as gold regains its luster. The company’s unique business model, which involves acquiring royalties and streams from mining companies, offers leverage to gold prices while reducing operational risks.
2. Nutrien Ltd (NTR): As the world’s largest provider of crop inputs and services, Nutrien is poised to benefit from the growing demand for food and biofuel production. With a focus on sustainable agriculture practices, NTR offers investors exposure to the fertile agricultural commodity sector. The company’s vertically integrated business model, spanning from mining and production to distribution and retail, provides a competitive advantage in the rapidly evolving agricultural landscape.
3. Darling Ingredients Inc (DAR): This company is a global leader in the production of sustainable natural ingredients from edible and inedible bio-nutrients, positioning it as a key player in the growing demand for renewable resources. DAR’s diversified product portfolio, which includes animal feed, food ingredients, and renewable energy solutions, makes it an attractive investment opportunity. The company’s commitment to sustainability and circular economy principles positions it well to capitalize on the global shift towards more eco-friendly practices.

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Factors Driving Commodity Stock Outlook in 2024

Several key factors are shaping the outlook for commodity stocks in 2024:

• China Stimulus Potential: Any increase in economic stimulus measures by the Chinese government could boost demand for commodities like iron ore, copper, and other industrial metals, driving prices and stock valuations higher. China’s economic growth and infrastructure development plans are closely watched by commodity investors, as the country is a major consumer of raw materials.
• Property Market Recovery: A recovery in China’s struggling property market could also have a positive impact on commodity demand, particularly for materials like iron ore and copper used in construction. The real estate sector’s health is a crucial determinant of demand for building materials and, consequently, the performance of related commodity stocks.
• Interest Rate Expectations: The consensus among investors is that interest rates are nearing their peak, which could lead to higher economic growth and stronger industrial production, benefiting commodity producers. Lower interest rates typically support economic expansion and increased demand for commodities across various sectors.
• Supply Constraints for Metals/Mining: Ongoing supply constraints in the metals and mining sectors, driven by factors like labor shortages, underinvestment in new projects, and geopolitical tensions, could support higher prices for commodities like copper and gold. These supply-side challenges contribute to tighter market conditions and potentially higher profit margins for producers.

Top Commodity ETFs for May 2024

For investors seeking broad exposure to the commodity markets, ETFs offer a convenient and cost-effective solution. Here are some of the top commodity ETFs to consider in May 2024:

1. Energy Select Sector SPDR Fund (XLE): This ETF tracks the energy sector of the S&P 500, providing exposure to companies involved in the exploration, production, and distribution of energy resources like oil and natural gas. With energy prices remaining volatile and the global transition towards cleaner energy sources underway, XLE offers a way to gain exposure to this dynamic sector.
2. iShares Gold Trust (IAU): As one of the largest and most liquid gold ETFs, IAU offers a simple and cost-effective way to invest in physical gold bullion, providing a hedge against inflation and market volatility. Gold has long been regarded as a safe-haven asset, and its performance is often inversely correlated with traditional asset classes, making it an attractive diversification tool.
3. Abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD): This ETF offers exposure to a diversified basket of commodities, including energy, precious metals, industrial metals, and agriculture, through a unique strategy that aims to mitigate the effects of contango and backwardation. BCD’s broad exposure and innovative approach make it a compelling choice for investors seeking comprehensive commodity exposure.
4. United States Oil Fund, LP (USO): For investors seeking direct exposure to the price of crude oil, USO is designed to track the performance of the West Texas Intermediate (WTI) light, sweet crude oil futures contract. As a pure play on oil prices, USO can be a speculative investment for those with a bullish outlook on the energy sector.
5. Abrdn Physical Precious Metals Basket Shares ETF (GLTR): This ETF provides exposure to a basket of precious metals, including gold, silver, platinum, and palladium, offering diversification within the precious metals sector. GLTR’s unique composition allows investors to gain exposure to various precious metals, each with its own supply and demand dynamics.
6. iShares S&P GSCI Commodity-Indexed Trust (GSG): Withholdings spanning energy, metals, livestock, and agriculture, GSG offers broad exposure to the commodity markets through a single ETF. This diversified approach can help mitigate the risks associated with any single commodity while capturing the potential benefits of the asset class as a whole.
7. Invesco DB Commodity Index Tracking Fund (DBC): This ETF tracks the DBIQ Optimum Yield Diversified Commodity Index, providing exposure to a diverse range of commodities, including energy, metals, and agriculture. DBC’s index methodology aims to optimize yield by dynamically adjusting exposure to various commodities based on market conditions.
8. Invesco DB Agriculture Fund (DBA): As the name suggests, DBA is focused on the agriculture sector, offering investors a way to gain exposure to commodities like corn, soybeans, and wheat. With the global population growing and the demand for food and biofuels increasing, the agricultural commodity sector presents attractive investment opportunities.

Benefits of Commodity ETFs

Commodity ETFs offer several advantages over direct investment in physical commodities or commodity futures:

• Low Costs: ETFs typically have lower expense ratios compared to actively managed commodity funds, making them a cost-effective investment option. This can translate into higher returns over the long run, as lower fees compound over time.
• Diversification: By investing in a single ETF, investors can gain exposure to a diverse range of commodities, reducing the risk associated with any single commodity. This built-in diversification can help mitigate the volatility inherent in commodity markets.
• Liquidity: Commodity ETFs trade on major exchanges like stocks, providing investors with easy entry and exit points. This liquidity advantage makes it easier to buy and sell shares, facilitating efficient portfolio management.
• Tax Efficiency: Unlike commodity futures or direct investments in physical commodities, commodity ETFs are generally more tax-efficient for investors. This is because ETFs are structured to avoid the potentially high tax burdens associated with direct commodity investments.
• Accessibility: Investing directly in physical commodities or futures contracts can be complex and capital-intensive. ETFs provide a more accessible and user-friendly way for individual investors to gain exposure to commodity markets without the need for specialized knowledge or substantial capital.
• Transparency: Commodity ETFs are required to disclose their holdings and methodologies, offering investors a high degree of transparency into the underlying investments. This transparency can aid in making informed investment decisions and monitoring portfolio exposures.
• Flexibility: ETFs can be easily incorporated into various investment strategies, allowing investors to tailor their exposure to commodities based on their risk tolerance, investment horizon, and overall portfolio objectives.

While commodity ETFs offer numerous benefits, it’s important to note that they are still subject to the inherent risks associated with commodity investments, such as volatility, geopolitical factors, and supply and demand dynamics. As with any investment, thorough research and portfolio diversification are essential to mitigating risks and achieving long-term success.

Key Risks to Watch For

While commodity investments can offer attractive returns and diversification benefits, they are not without risks. Here are some key factors to consider:

1. Geopolitical Tensions: Conflicts between nations or regions can disrupt commodity supply chains and impact prices, introducing volatility to commodity investments. For example, tensions between major oil-producing countries or regions could lead to supply disruptions and price spikes in the energy sector.
2. Extreme Weather: Agricultural commodities, in particular, are susceptible to weather patterns like droughts, floods, and other natural disasters, which can significantly impact supply and prices. Adverse weather conditions can lead to crop failures, supply shortages, and price volatility, affecting investments in the agricultural commodity sector.
3. China’s Economic Growth: As a major consumer of commodities, China’s economic performance can have a profound impact on commodity demand and prices. A slowdown in China’s growth or shifts in its economic policies could dampen demand for raw materials, potentially weighing on commodity prices and related investments.
4. Interest Rate Uncertainty: If interest rates remain higher than expected, it could dampen economic growth and, consequently, demand for commodities, negatively impacting prices and investment returns. Higher interest rates can also increase the cost of carrying inventories for commodity producers, squeezing profit margins.
5. Currency Fluctuations: Many commodities are priced in U.S. dollars, and fluctuations in currency exchange rates can affect the profitability of producers and the returns for investors holding commodity investments denominated in other currencies.
6. Regulatory Changes: Changes in regulations, such as environmental policies or trade agreements, can impact the production, transportation, and consumption of commodities, affecting supply and demand dynamics and, consequently, prices.
7. Technological Advancements: Innovations in areas like renewable energy, sustainable agriculture, or material science could disrupt traditional commodity markets, potentially reducing demand for certain commodities or rendering others obsolete.

Understanding and monitoring these risks, investors can make more informed decisions about their commodity investments and adjust their portfolios accordingly.

How to Pick Winning Commodity Investments

While commodities offer attractive investment opportunities, it’s crucial to approach them with a well-informed and disciplined strategy. Here are some tips for selecting winning commodity investments:

1. Research Outlook for Specific Commodities: Conduct thorough research on the supply and demand dynamics, geopolitical factors, and industry trends that could impact the performance of specific commodities you’re interested in. Understand the drivers of each commodity market and stay up-to-date with relevant news and analysis.
2. Consider Your Portfolio’s Existing Exposure: Evaluate your current portfolio’s exposure to commodities and diversify accordingly. Overexposure to a single commodity or sector can increase risk, while a well-diversified portfolio can help mitigate volatility.
3. Invest for the Long-Term: Commodity prices can be volatile in the short term, so it’s essential to maintain a long-term perspective when investing in this asset class. Short-term fluctuations should be viewed as temporary, and investors should focus on the underlying supply and demand fundamentals that drive commodity markets over the long run.
4. Don’t Overallocate to Volatile Assets: While commodities can provide diversification benefits, they are generally more volatile than traditional stocks and bonds. Limit your exposure to a level that aligns with your risk tolerance and investment objectives, and rebalance your portfolio periodically to maintain your desired asset allocation.
5. Utilize Dollar-Cost Averaging: To mitigate the impact of market timing and volatility, consider employing a dollar-cost averaging strategy. This involves investing a fixed amount of money at regular intervals, rather than investing a lump sum all at once. This approach can help smooth out the effects of price fluctuations and potentially lower your average cost basis over time.
6. Monitor Market Conditions: Stay informed about global economic conditions, geopolitical developments, and industry trends that could impact commodity markets. Be prepared to adjust your investment strategy as needed to capitalize on emerging opportunities or manage risks effectively.
7. Consider Professional Advice: For investors with limited experience or knowledge in commodity investing, seeking guidance from a professional financial advisor or investment manager can be beneficial. These professionals can help develop a tailored investment strategy and provide ongoing monitoring and portfolio management services.

Following these best practices and maintaining a disciplined approach, investors can increase their chances of success in capitalizing on the opportunities presented by commodity investments.

Conclusion

As investors navigate the challenging landscape of 2024, commodities present a compelling opportunity to hedge against inflation, diversify portfolios, and potentially capitalize on global economic trends. By carefully evaluating the top commodity stocks and ETFs, factoring in key risks and drivers, and implementing a well-researched investment strategy, savvy investors can position themselves to weather market volatility and potentially generate attractive returns.

However, it’s important to remember that commodity investments, like any asset class, carry inherent risks and should be approached with caution and a long-term mindset. Diversification, thorough research, and a disciplined investment approach are crucial to maximizing the potential benefits of commodity investments while mitigating associated risks.

As the global economy continues to evolve, the demand for commodities is likely to remain strong, driven by factors such as population growth, industrialization, and the transition towards sustainable energy sources. By staying informed, monitoring market conditions, and making strategic investment decisions, investors can position themselves to capitalize on the commodity riches that lie ahead.