Commodities: More Than an Inflation Hedge

Harbor All-Weather Inflation Focus ETF (HGER)

“Inflation simply means that the prices of things are rising. You see it at the gas pump, the grocery store, and when shopping online. If you want to offset the impact this can have on your life, one solution is to invest in the underlying raw materials - like oil, gas, corn, coffee, wheat and even the cotton that goes into your t-shirt.”

This very pragmatic advice comes from Spencer Logan, CFA, CAIA, FDP, Director, Investment Specialist at Harbor Capital Advisors.

“The Harbor All-Weather Inflation Focus ETF (HGER) not only offers investors exposure to these types of raw materials, or commodities, it does so in a way that is designed to be particularly sensitive to inflation,” he adds.

But offsetting the pain of inflation on your bank account with gains in your portfolio is far from the only reason to consider adding commodities to your financial strategy. “We feel that commodities have been very underrepresented in recent years. There was not a lot of inflationary pressure in the period since the Global Financial Crisis, and perhaps they were temporarily forgotten. But now that inflation is in the headlines, investors are paying attention and remembering the benefits of this asset class,” he says.

Those benefits fall into two major categories. The first is diversification.

Diversification

“Increased diversification has the potential to result in a smoother ride for investors,” says Logan. “We call commodity futures an uncorrelated asset class. That means that they do not move in lockstep with stocks and bonds. In fact, during periods when stocks and bonds are moving together, commodities have tended to go their own way. It’s often been said that diversification is the only free lunch in investing. Commodities are an asset class that have shown to help support that point.”

“Increased diversification has the potential to result in a smoother ride for investors.”

One big reason for this behavior is inflation itself. Too much of it will trigger the Federal Reserve to raise interest rates in order to discourage borrowing and spending. This gives prices a chance to cool off, but it can also be a drag on stocks and bonds. Commodities, on the other hand are often benefactors of this same inflation and tend to rise during periods of rising inflation and interest rate hikes, where both stocks and bonds tend to falter.

Return Potential

The second major benefit of commodities is a possible attractive return opportunity. And because of the way futures markets work, you don’t necessarily need inflation to generate a return.

“Right now, scarcity is driving commodity prices higher. People are flush with cash thanks to a period of low interest low rates, and at the same time, we’ve got global supply chain disruptions and the Russian invasion choking off significant natural resources. That means there’s a lot of money chasing fewer goods,” says Logan. “With these market dynamics helping to drive higher levels of scarcity in a record number of resources, HGER has the potential to generate positive returns, even if commodity prices stay flat.”

“HGER has the potential to generate positive returns, even if commodity prices stay flat.”

“Looking beyond the current moment, commodities tend to go through long cycles of over- and underperformance. We’ve just come through a decade-long slump. We believe that years of underinvestment plus rising aggregate demand could set the stage for a new ‘super cycle’ of gains in commodity prices,” he adds.

Logan says HGER represents a new benchmark for how investors hedge - or guard against - inflation risk. The ETF has a distinct management style, which can be credited to its highly skilled and experienced team.

Quantix Commodities: Driving Strategy Innovation

“Don Casturo and several of his colleagues on the Quantix investment management team spent more than 7 years together at Goldman Sachs, known in the industry as the preeminent commodities trading house in the world. The team averages more than 20 years of experience investing in commodities and have added some very useful innovations to traditional commodity benchmarks along the way, like the ability to have heightened sensitivity to inflation in an index they recently developed (Quantix Inflation Index, QII) which also serves as the tracking index for HGER. They also have proprietary trading strategies that allow them to pursue positive returns even when inflation is relatively benign,” says Logan.

Commodities as an asset class have come into much sharper focus for many investors, driven by an environment with inflation reaching more than 40-year highs, sharp interest rate increases, and major stock and bond markets faltering. But Logan stresses that an investment in HGER should not be seen as purely opportunistic.

“Our research has shown that adding commodity futures to a mix of 60% stocks and 40% bonds often improved the portfolio’s overall risk-adjusted return over multiple time horizons. We feel this means you can afford to seek higher returns, reduce risk, or potentially both, depending on your goals. To me, that makes sense in any environment.”

While a strong case can be made for investing in commodities today, the overall benefits that commodities can potentially deliver to a portfolio over the long-term may be just as, or even more important for investors to consider.

Learn about our insights & how your Harbor representative can help.

Important Information

Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com 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.

There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. A non-diversified Fund may invest a greater percentage of its assets in securities of a single issuer, and/or invest in a relatively small number of issuers, it is more susceptible to risks associated with a single economic, political or regulatory occurrence than a more diversified portfolio.

Neither asset allocation or diversification can assure a profit or protect against loss in a declining market.

The Quantix Inflation Index is calculated on a total return basis, which combines the returns of the futures contracts with the returns on cash collateral invested in 13-week U.S. Treasury Bills. This unmanaged index does not reflect fees and expenses and is not available for direct investment. The Quantix Inflation Index was developed by Quantix Commodities LP and is owned by Quantix Commodities Indices LLC.

This material may reference counties which may be generally the subject of selective sanctions programs administered. Readers of this commentary are solely responsible for ensuring that their investment activities in relation to any sanctioned country is carried out in compliance with applicable Laws, rules or policies.

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.

The views expressed herein are those of the speaker at the time the comments were made. They may not be reflective of their current options, are subject to change without prior notice, and should not be considered investment advice.

Quantix Commodities LP ("Quantix") is a third-party subadvisor to the Harbor All-Weather Inflation Focus ETF.

Foreside Fund Services, LLC is the Distributor of the Harbor All-Weather Inflation Focus ETF.

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