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Over the last few months, we’ve covered several inflation-hedging ETFs, including those focused on commodity futures, miners, equity inflation beneficiaries, and more.These have generally performed pretty well as inflation has spiked, but should underperform when inflation picks back up under control. Conversely, most of these ETFs have positive long-term return expectations, so you can hold them for the long term without major problems. It’s hard, but it’s best to inflate at the right time, but long-term holding is fine. At least, most of these funds do. Invesco DB Commodity Index Tracking ETF (NY SEARCA: DBC), which is an exception.
DBC’s long-term expected return is close to zero, possibly even negative. This is because fund holdings do not generate profits, cash flow, or income.Investors are approximately none If inflation normalizes, we will raise funds from these funds. This seems highly probable.and the Fed is committed to fighting inflation.’until the job is done‘.inflation can Always upside surprises, but I have no reason to believe this to be the case, nor do I see any possible catalysts.
DBC – a brief overview
DBC is a diversified commodity index ETF that tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return. Commodity weights are moderately spread, fixed and rebalanced annually. My target weight is:
DBC
The actual current weights of DBC will not differ significantly from the above.
DBC’s exposure to commodities is obtained through futures contracts. These are contracts to buy or sell a specific commodity at a specific price on a specific date. The contract is structured such that buyers, including DBC, benefit from rising commodity prices, but suffer losses from falling prices. The contract is somewhat costly, but DBC takes steps to minimize that cost.
DBC should work well when commodity prices rise. This happens almost by definition when inflation is high and rising. Inflation has picked up over the past 12 months, and DBC has performed very well during that time, as expected.
DBC is a simple diversified commodity ETF that performs exceptionally well when commodity prices are rising or when inflation is high and rising, making it a great trading vehicle for commodity bulls. However, there are many funds with similar characteristics, such as funds focused on energy stocks, miners, etc. DBC has two key advantages that he has over most of his peers. Let’s take a look at these.
DBC-Benefits
Pure commodity play
DBC’s commodity price exposure is direct through futures contracts. The contract shall: Expressly Ignoring issues such as valuation, investor sentiment and dividends, they are structured to profit when commodity prices rise. When oil prices rise, so do oil futures prices, which, with very few exceptions, boosts DBC’s stock price.
Most other funds Indirect Commodity price exposure. For example, energy stocks should do it When oil prices rise, stock prices rise, and energy fund stock prices rise.Importantly, energy stocks No Actual performance will depend on many factors, including fundamentals. When investor sentiment. Energy stocks can easily underperform as oil prices rise for a variety of reasons.
As an example, the energy exponent is barely It rose in the second half of 2020 despite a sharp rise in oil prices. Energy’s poor performance was almost certainly due to investor sentiment. Investor demand for energy stocks was incredibly weak, despite strong prices and fundamentals.
Importantly, DBC itself does not have these problems. As previously mentioned, the Fund’s underlying holdings are structured to yield profits when commodity prices rise, regardless of investor sentiment. As expected, DBC posted a significant rise in his second half of 2020.
DBC’s direct exposure to commodity prices ameliorate the above problems and benefits the fund and its shareholders. This plus is especially important for commodity price bulls for obvious reasons. This positive factor is especially important in the short term, when investor sentiment dominates, but less important in the long term, when fundamentals are most important. As an example, DBC outperformed the Energy Index in his second half of 2020, but the gap narrowed significantly in his next six months as investor sentiment improved.investor psychology can But fundamentals matter, and tend to take precedence over sentiment over time.
In the short term, DBC outperformed significantly. Long term, not so much.
Exposure to diverse commodities
DBC to investors diversified Commodity exposures with exposures to the most relevant commodities. Diversification reduces risk, volatility, potential loss or underperformance due to the idiosyncrasies of a particular instrument.
Single-commodity ETFs, on the other hand, are focused on one particular commodity and may underperform in a broader inflation environment if that particular commodity underperforms. Silver and gold prices stagnated despite a general surge in inflation and commodity prices.Silver and Gold ETFs, Stocks When Both posted losses during the year despite very high inflation.
DBC, on the other hand, diversified Being a commodity ETF, it doesn’t really suffer from the above issues. As long as commodity prices are generally rising, the fund’s returns should be positive. Some lags don’t matter as other commodities can pick up the slack. As an example, DBC made a very healthy profit in his 2022. Gold and silver underperformed the fund, but oil and energy commodities more than made up for these losses.
DBCs – Disadvantages
Low expected long-term return
DBC’s biggest drawback is the fund’s low expected long-term return. Unlike most other asset classes and peers, the fund’s underlying holdings do not generate or entitle investors to any income, cash flow, or income, resulting in lower expected returns.
Stocks pay dividends. Exxon (XOM) is currently paying 3.2% and its dividend is on the rise.
Government bonds pay interest. I bonds he pays 6.9% and interest rates should rise as inflation rises.
oil futures payments noneInvest in oil futures, receive 0.0% dividend or interest and pay 0.86% to DBC for privileges.
oil futures right Higher oil prices drive up prices, and the same is almost certainly true for Exxon and I-bonds. As expected, Exxon surged in 2022.
I Bonds have also shown excellent returns, with yields jumping from 6.0% to 9.0% in recent months (currently 6.9%).
A DBC’s return, cash flow, or lack of return is the fund’s most significant shortcoming, especially in the long term. Exxon’s dividend is less than 1.0% for the quarter, a rounding error. Short-term traders may prefer DBC’s more direct commodity price exposure to Exxon’s modest quarterly dividend. Exxon’s dividend reaches a respectable 3.3% for the year. After 10 years, the company’s dividend will be over 33% for him. This is before considering dividend increases, dividend reinvestments and share buyback plans. These are very important and beneficial to long-term investors in Exxon and almost certainly outweigh DBC’s more direct commodity price exposure.
At the same time, DBC pays. none With dividends, interest, etc., unlike Exxon, other stocks, bonds, and most other asset classes. This will very As has been the case since its inception, it is difficult for DBC to outperform its peers over the long term.
As seen above, DBC has recorded a total cumulative return of 13.2% since its inception. twenty years Before. Most major asset classes, including equities, government bonds and energy stocks, have posted much stronger returns over the same period. Exxon is also up. DBC has been unable to compete with these asset classes due to the fund’s lack of underlying returns, cash flow and income.
In my opinion, given the above, DBC will almost certainly not be able to compete with these same asset classes in the long run. We are moving forward. In my opinion this is Unbelievably It’s a significant negative and outweighs the other benefits of the fund.
Conclusion
DBC’s expected long-term returns are very low, a major negative for the fund and its shareholders. Therefore, we will not invest in the fund at this time.