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Leveraging Commodities as an Inflation Hedge
May 16, 2022About Commodities
Commodities are a broad, but distinguishable asset class with returns that are largely independent of stock and bond returns. They include precious metals such as gold & silver, industrial metals like copper, zinc, and aluminum, oil and natural gas, livestock, and food-based commodities like grains, coffee and sugar. Adding commodity exposure can help diversify an existing portfolio of stocks and bonds, and potentially lower the risk of a portfolio, while boosting returns—particularly, during periods of rising inflation.
What About Other Forms of Hedging Inflation?
Facing a nearer-term and potentially longer-term backdrop of higher inflation, investors are increasingly seeking the perceived hedging benefits of asset classes such as US Treasury Inflation-Protected Securities (TIPS), Real Estate Investment Trusts (REITs) and commodity related equities. However, TIPS feature significant interest rate risk and have shown a weak relationship to inflation during periods when real interest rates rise. Also, REITs have historically been pressured by rising interest rates and higher borrowing costs, while commodity related equities have proven susceptible to margin pressure due to rising input costs in inflationary periods.
Unlike other asset classes, commodities and inflation have a unique relationship, where the former can be an indicator of inflation to come. As the price of a commodities rise, so does the price of the products that the commodity is used to produce. Because commodities prices typically rise when inflation is accelerating, they have shown to offer a relatively stronger hedge against the negative effects of inflation.
Why Commodities Now?
Of course, financial markets expect a certain level of cyclical inflation and factor it into the asset prices they set—a condition that is theoretically neutral for investment portfolios. However, rising inflation can erode portfolios' purchasing power, which can be a challenge for investors with shorter investment horizons, such as retirees. Therein lies the call to take timely action to hedge against inflation.
Historic trends suggest that commodities stand apart as a trusted tool for hedging against rising inflation. As Vanguard reported, over the last three decades, commodities have had a statistically significant and largely consistent positive inflation beta, or predicted reaction to a unit of inflation.1 The research, led by Sue Wang, Ph.D., an assistant portfolio manager in Vanguard Quantitative Equity Group, found that over the last decade, commodities’ inflation beta has fluctuated largely between 7 and 9. This suggests that a 1% rise in unexpected inflation would produce a 7% to 9% rise in commodities.
How to Invest in Commodities for Inflation Hedging?
As inflation recently hit a 40-year high, fortunately, it is possible to broadly invest in commodities via exchange traded funds (ETFs). Harbor’s All-Weather Inflation Focus ETF (HGER) (Strategy Profile | Product Detail) is a commodity ETF that addresses rising inflation, and it can serve as an effective hedging tool. HGER features broad-based commodity exposures but stands out as an inflation hedge through its specific focus on targeting inflation sensitive commodities and dynamic approach to accounting for different types of inflation. HGER is specifically engineered to hedge against inflation.
When inflation continues to grow unabated, investors start looking for ways to plug the leak that is diminishing their buying power. While no investment offers a guaranteed hedge, there are strategies to play the markets and diversify your portfolio with commodities in a manner that can help you weather the current storm.
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- Learn more about Harbor’s All-Weather Inflation Focus ETF (HGER): Strategy Profile | Product Detail
Important Information
Investors should carefully consider the investment objectives, risks, charges and expenses of a fund before investing. To obtain a summary prospectus or prospectus for this and other information, click here or call 800-422-1050. Read it carefully before investing.
Investing involves risk, principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. The ETF is new and has limited operating history to judge.
Commodity Risk: The Fund has exposure to commodities through its and/or the Subsidiary's investments in commodity-linked derivative instruments. Authorized Participant Concentration/Trading Risk: Only authorized participants (“APs”) may engage in creation or redemption transactions directly with the Fund. Commodity- Linked Derivatives Risk: The Fund's investments in commodity-linked derivative instruments (either directly or through the Subsidiary) and the tracking of an Index comprised of commodity futures may subject the Fund to significantly greater volatility than investments in traditional securities.
Beta is a measure of systematic risk, or the sensitivity of a fund to movements in the benchmark. A beta of 1 implies that the expected movement of a fund's return would match that of the benchmark used to measure beta.
Foreside Fund Services, LLC is the Distributor of the Harbor ETFs.
Harbor Funds Distributors, Inc. is the Distributor of the Harbor Mutual Funds.
