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Invesco ETFs
Commodity investing with Invesco ETFs
Investing in commodities comes with several potential benefits, especially during periods of inflation and supply and demand imbalances.
Diversification
Incorporating commodities can help diversify1 a traditional investment portfolio of stocks and bonds.
Potential inflation hedge
Allocating to commodities can offer a hedge against elevated inflation.2
Attractive return potential
Given its global reach and wide usage, commodities may offer attractive return potential.
Transcript
It’s the 10-year anniversary of Invesco’s flagship commodity ETF, the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF, ticker PDBC. It’s the largest broad-based commodity ETF in the US and globally based on AUM — a distinction it has earned since March 2020.1
With commodities being challenged, after a very strong 2021 and first half 2022, some may be wondering why they’re still relevant. I’m using PDBC’s anniversary to remind investors why commodities still deserve a spot in a portfolio.
Let’s start with geopolitics, which has been front and center. With no immediate end in sight for the wars in Ukraine and the Middle East, any escalation can lead to material supply disruptions in energy and agricultural commodities. Given Russia, Ukraine, and the Middle East all play major roles in the commodities market, this may have far-reaching consequences. Also, growing tension between the West and China, present real risks for global trade and supply chains. As the world becomes increasingly intertwined, whether through geopolitics or global initiatives, commodities may serve as a potential hedge against the resulting inflationary pressures.
Next, investing in commodities allows investors to participate in future trends like the energy transition and artificial intelligence. As global economies move to secure their supply chains needed to get ahead of these trends, commodities will likely benefit from the inflationary effect.
Another reason to consider commodities is the weather. The increased occurrence of extreme weather events in the past decade are being felt in the energy and agricultural markets.
There’s also potential upside during central bank easing cycles. Lower interest rates may boost investor’s risk appetite and stimulate economic activity, leading to higher demand. And, as always, commodities may offer diversification benefits to your portfolio.
Consider PDBC to add exposure to a diverse group of the world’s most heavily traded commodities.
Happy 10th anniversary PDBC!
Before investing, investors should carefully read the prospectus/summary prospectus and carefully consider the investment objectives, risks, charges, and expenses. For this and more complete information about the Fund call 800-983-0903 or visit invesco.com for the prospectus/summary prospectus.
Important Information
1 Source: Bloomberg L.P., Sept. 30, 2024.
Not a Deposit Not FDIC Insured Not Guaranteed by the Bank May Lose Value Not Insured by any Federal Government Agency
Before investing, investors should carefully read the prospectus/summary prospectus and carefully consider the investment objectives, risks, charges, and expenses. For this and more complete information about the Fund call 800-983-0903 or visit invesco.com for the prospectus/summary prospectus.
There are risks involved with investing in ETFs, including possible loss of money. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.
The Fund is subject to management risk because it is an actively managed portfolio. The investment techniques and risk analysis used by the portfolio managers may not produce the desired results.
Risks of futures contracts include: an imperfect correlation between the value of the futures contract and the underlying commodity; possible lack of a liquid secondary market; inability to close a futures contract when desired; losses due to unanticipated market movements; obligation for the Fund to make daily cash payments to maintain its required margin; failure to close a position may result in the Fund receiving an illiquid commodity; and unfavorable execution prices.
In pursuing its investment strategy, particularly when "rolling" futures contracts, the Fund may engage in frequent trading of its portfolio securities, resulting in a high portfolio turnover rate.
Commodity-linked notes may involve substantial risks, including risk of loss of a significant portion of principal and risks resulting from lack of a secondary trading market, temporary price distortions, and counterparty risk.
Swaps involve greater risks than direct investments. Swaps are subject to leveraging, liquidity and counterparty risks, and therefore may be difficult to value. Adverse changes in the value or level of the swap can result in gains or losses that are substantially greater than invested, with the potential for unlimited loss.
Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.
To qualify as a regulated investment company (“RIC”), the Fund must meet a qualifying income test each taxable year. Failure to comply with the test would have significant negative tax consequences for shareholders. The Fund believes that income from futures should be treated as qualifying income for purposes of this test, thus qualifying the Fund as a RIC. If the IRS were to determine that the Fund’s income is derived from the futures did not constitute qualifying income, the Fund likely would be required to reduce its exposure to such investments in order to maintain its RIC status.
The Fund’s strategy of investing through its Subsidiary in derivatives and other financially-linked instruments whose performance is expected to correspond to the commodity markets may cause the Fund to recognize more ordinary income. Particularly in periods of rising commodity values, the Fund may recognize higher-than-normal ordinary income. Investors should consult with their tax advisor and review all potential tax considerations when determining whether to invest.
Leverage created from borrowing or certain types of transactions or instruments may impair liquidity, cause positions to be liquidated at an unfavorable time, lose more than the amount invested, or increase volatility.
The Fund may hold illiquid securities that it may be unable to sell at the preferred time or price and could lose its entire investment in such securities.
The Fund currently intends to effect creations and redemptions principally for cash, rather than principally in-kind because of the nature of the Fund's investments. As such, investments in the Fund may be less tax efficient than investments in ETFs that create and redeem in-kind.
The Shares of the Fund are not deposits, interests in or obligations of any Deutsche Bank AG, Deutsche Bank AG London Branch, Deutsche Bank Securities Inc. or any of their respective subsidiaries or affiliates or any other bank (collectively, the "DB Parties") and are not guaranteed by the DB Parties.
DBIQ Optimum Yield Diversified Commodity Index Excess ReturnTM and DBIQ Optimum Yield Diversified Commodity Index Total ReturnTM (the ""Indices"") are products of Deutsche Bank AG and/or its affiliates. Information regarding these Indices is reprinted with permission. Deutsche Bank® DBTM, DBIQ®, Optimum YieldTM, DBIQ Optimum Yield Diversified Commodity Index Excess ReturnTM and DBIQ Optimum Yield Diversified Commodity Index Total ReturnTM are trademarks of Deutsche Bank AG. The indexes and trademarks have been licensed for use for certain purposes by Invesco Capital Management LLC, an affiliate of Invesco Distributors, Inc. The Fund is not sponsored, endorsed, sold or promoted by DB Parties or their third-party licensors and none of such parties makes any representation, express or implied, regarding the advisability of investing in the Fund, nor do such parties have any liability for errors, omissions, or interruptions in the Indices. The Indices are calculated and administered by DB Parties without regards to the Fund.
Invesco Capital Management LLC and Invesco Distributors, Inc. are not affiliated with Deutsche Bank Securities Inc.
Beta is a measure of risk representing how a security is expected to respond to general market movements. Smart Beta represents an alternative and selection index-based methodology that seeks to outperform a benchmark or reduce portfolio risk, or both. Smart beta funds may underperform cap-weighted benchmarks and increase portfolio risk.
Invesco Distributors, Inc. 10/24 NA 3972915
Offering unique commodity solutions
Invesco is a leader within commodity ETFs, offering unique solutions since 2006. Our distinct commodity lineup is represented by nine ETFs that provide clients access to a diverse group of commodity sectors and may provide three key benefits: diversification, potential inflation hedge and attractive return potential.
Commodity ETF line-up
| Ticker | Fund name | Total expense ratio | Net expense ratio | Download |
|---|---|---|---|---|
| PDBC | Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF | 0.67% | 0.59%* | Fact sheet |
| PDBA | Invesco Agriculture Commodity Strategy No K-1 ETF | 0.74% | 0.59%* | Fact sheet |
| EVMT | Invesco Electric Vehicle Metals Commodity Strategy No K-1 ETF | 0.73% | 0.59%* | Fact sheet |
| DBC | Invesco DB Commodity Index Tracking Fund | 0.87% | 0.87% | Fact sheet |
| DBA | Invesco DB Agriculture Fund | 0.92% | 0.92% | Fact sheet |
| DBB | Invesco DB Base Metals Fund | 0.79% | 0.79% | Fact sheet |
| DBE | Invesco DB Energy Fund | 0.77% | 0.77% | Fact sheet |
| DBO | Invesco DB Oil Fund | 0.76% | 0.76% | Fact sheet |
| DBP | Invesco DB Precious Metals Fund | 0.76% | 0.76% | Fact sheet |
*The Adviser has contractually agreed to waive fees and/or pay certain Fund expenses through at least Aug. 31, 2025.
Additional resources
PDF
Latest commodity digest
Our commodity experts provide a monthly review of the commodity market and key drivers going forward.
Transcript
PDF
PDBC: A commodities leader, 10 years in the making
Our specialists reflect on PDBC’s performance, highlights, and potential benefits in celebration of it’s anniversary on November 7th, 2024.
Transcript
Frequently asked questions
Commodities can be attractive for investors seeking diversification,1 an inflation hedge,2 or simply attractive return potential.
- Diversification: Historically, commodity returns have had a low correlation to equities and a negative correlation to fixed income, which may help improve the risk-adjusted returns of a diversified portfolio.3
- Inflation Hedge: Although inflation has been easing year-over-year, the US Consumer Price Index (CPI) remains stubbornly above the US Federal Reserve’s (Fed) 2% target. Commodities have historically been the most efficient hedge for inflation and have returned positively 76% of the time when CPI was above 2%.4
- Attractive return potential: Investing in commodities can help investors benefit from inflation and supply/demand imbalances when the prices of oil, agriculture, and other natural resources rise. We may currently be in the early innings of a strong multi-year, structural commodity bull cycle that is being driven by heightened geopolitical tensions, rising energy costs, renewed focus on climate initiatives, and climate change, in our view.
In addition to the benefits of commodities in general, investing through ETFs can also provide increased benefits like convenience, ease of access, and transparency.
- Convenience: While some commodity ETFs do hold physical commodities, most are futures- and derivatives-based, allowing investors to participate in the returns without having to worry about taking physical delivery of the commodity. The futures contracts are replaced by a later-dated contract prior to expiry in a process known as "rolling" futures contracts.
- Ease of Access: Like stocks, commodity ETFs can be traded on a stock exchange anytime during market hours. This aspect can offer greater flexibility when compared to mutual funds.
- Transparency: ETFs may provide increased transparency into their portfolio holdings compared to mutual funds. Most ETFs publicly disclose their holdings daily.
Some of the most heavily traded global commodities include Brent crude oil, West Texas Intermediate (WTI) crude oil, natural gas, gold, silver, copper, and agricultural commodities, such as corn and sugar. While the broader universe is significantly more expansive, the DBIQ Optimum Yield Diversified Commodity Index Excess Return provides exposure to 14 of the most widely traded commodities in the world.
The commodities landscape is comprised of four primary sub-sectors: Agriculture, energy, industrial metals, and precious metals.
- Energy: Gasoline, WTI crude oil, Brent crude oil, NY Harbor Ultra Low Sulfur Diesel (ULSD)
- Precious metals: Gold, Silver
- Industrial metals: Copper, Zinc, Aluminum
- Agriculture: Sugar, Soybeans, Corn, Wheat
As measured by inflation beta5 from 1998 to 2022, commodities are historically the most efficient hedge for inflation of any major asset class, even when compared to common inflation-fighting instruments, like Treasury Inflation-Protected Securities (TIPS),6 real estate investments trusts (REITs),7 and gold.8 This is because commodities are raw materials used as inputs in housing, transportation, and food, all components of the CPI. In addition, inflation shocks are usually the byproduct of stronger-than-expected demand and/or supply uncertainty, all of which may boost the price of goods.
Futures contracts trade on exchanges, representing an agreement between the buyer and seller whereby the price is fixed, and the buyer agrees to take delivery of the underlying asset at a specified date in the future. Futures-based commodity ETFs use derivatives, including futures and swaps, to deliver commodity exposure.
In the commodity arena, spot prices typically don’t match futures prices, creating situations of backwardation and contango. Spot prices are the current costs for a particular commodity for immediate delivery, while futures prices reflect delivery of the commodity at a particular future date. Backwardation occurs when the spot price of a commodity is higher than futures prices, signaling an expected shortage of supplies; consumers are willing to pay more to receive the product now in preparation for the shortage. On the flip side, contango describes the scenario in which a commodity’s futures contracts are priced higher than what’s seen in the spot market, signaling an expected surplus; consumers aren’t willing to pay more right now, given the abundance of supplies.
Most of the first commodities ETFs that were launched invest in the front-month contract. Given commodities are physical assets, to avoid physical delivery, funds will have to frequently sell out of expiring contracts and move to the following futures contract. During contango markets, this repeated buying and selling of positions can expose funds to high roll costs, considering they would have to sell a less expensive, expiring contract and buy a more expensive, later-dated contract.
The optimum yield methodology is a key feature of Invesco’s commodity suite. This approach seeks to maximize the roll yield during backwardation markets and minimize roll costs during contango markets, reducing the burden for investors to monitor and understand changing futures curve shapes. During backwardation markets, rolling further out the curve can potentially allow the funds to realize roll yield as the contracts appreciate as they move toward expiry.
Given the global reach of commodities, commodity prices have many drivers. However, some of the key influencing factors include:
- Global Economic Health: The health of the global economy can directly impact the supply and demand of commodities, influencing prices. In particular, developments in China and the US often have an outsized influence since they are the world’s two largest global economies by gross domestic product (GDP), which measures the total value of a country's finished goods and services.
- Green Transition and Climate Volatility: Contrary to popular belief, the Energy Transition/Decarbonization trend is supportive of commodity prices given metals, like copper, aluminum, zinc, and nickel, play a significant role in the world’s path to net zero, yet efforts to reduce carbon emissions are significantly constraining supplies. This combination of growing demand and tightening supply could potentially create sustained global deficits in the metals sector for years — possibly decades — to come.
The growing application of environmental, social, and governance (ESG) and (greenification) investment solutions has also led to significant underinvestment in fossil fuels, such as oil and gas, stunting supply growth while global demand continues to climb. Extreme weather events may continue to upend supplies in the agricultural sector. Furthermore, there may be increased demand for agricultural commodities to be used as “energy crops” for ethanol and biodiesel.
- Geopolitics: Rising geopolitical tension, especially between significant players in this market, can lead to heightened uncertainty and volatility for prices, as we saw play out following Russia’s invasion of Ukraine. Tensions between the US and China have also been rising, which could potentially rewrite existing global trade routes.
Footnotes
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1
Diversification does not guarantee a profit or eliminate the risk of loss.
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2
Sources: Invesco and Bloomberg L.P., as of 12/31/21. Based on our analysis of the historical inflation betas (using data from 1998-2021) of commodities, REITs, large-cap value equities, large-cap blend equities, gold, TIPS, and bonds. Commodities had the highest inflation beta, making it historically the most efficient inflation hedge among the group. Large-cap value equities were higher than large-cap blend equities, making it historically a more efficient inflation hedge versus large-cap blend equities. Inflation beta is a metric used to evaluate an asset class's ability to hedge inflation. It measures the change in inflation against the return of the asset class over a specific time period (i.e., it describes the return of an asset class given a 1% increase in inflation.) The analysis is based on specific indexes used as proxies, which are as follows: Commodity — DBIQ OY Commodity Index (12.26), Commodity — BCOM Index (8.97), REITS — FTSE NAREIT All Equity REITS Index (5.79), Large-cap Value Equities — S&P 500 Pure Value Index (5.11), Large-cap Blend Equities — S&P 500 Index (2.91), Gold — XAU (2.88), TIPS — Bloomberg US Treasury Inflation-Linked Bond Index (1.58), and Bonds — Bloomberg Intermediate US Government/Credit Bond Index (-0.37). DBIQ OY Commodity Index — The DBIQ Optimum Yield Diversified Commodity Index is a rule-based index composed of futures contracts of the 14 most heavily traded and important global commodities. BCOM Index — The Bloomberg Commodity Index (BCOM) tracks the performance of a diversified basket of global commodities. REITs (as measured by FTSE NAREIT All Equity REITs Index) stands for Real Estate Investment Trusts, which are companies that own and/or operate income-producing real estate. The index is an unmanaged index considered representative of US REITs. The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. The S&P 500 Index is a market-capitalization-weighted index (the largest companies based on market capitalization make up the largest portion of the index) consisting of the 500 largest, most prominent publicly traded companies in the US as determined by S&P. XAU — Gold spot price quoted in US Dollars. TIPS (as measured by Bloomberg US Treasury Inflation-Linked Bond Index) stands for Treasury Inflation-Protected Securities, which are Treasury bonds indexed to inflation to protect investors against a decline in purchasing power. The index measures the performance of the US TIPS market. Bloomberg Intermediate US Government/Credit Bond Index is a broad-based benchmark that measures the non-securitized component of the US Aggregate Index with less than 10 years to maturity. The index is comprised of the Intermediate US Treasury and US agency indices.
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3
Source: Bloomberg, L.P., as of 3/31/23. Correlation time period 12/31/1997 to 3/31/2023. Commodities are represented by the S&P GSCI Index Total Return. Stocks are represented by the S&P 500 Total Return Index. Bonds are represented by the Bloomberg US Treasury Bond Index. A correlation is any statistical relationship, whether causal or not, between two random variables or bivariate data. An investment cannot be made directly into an index.
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4
Source: Bloomberg L.P., Jan 1991–Mar 2023. CPI is represented by the CPI YOY Index, and commodities are represented by the S&P GSCI Index. The analysis is based on the year-over-year CPI and monthly rolling year-over-year commodity returns.
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5
Inflation beta is a metric used to evaluate an asset class’s ability to hedge inflation. It measures the change in inflation against the return of the asset class over a specific time period.
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6
The value of inflation-linked securities will fluctuate in response to changes in real interest rates, generally decreasing when real interest rates rise and increasing when real interest rates fall. Interest payments on such securities generally vary up or down along with the rate of inflation. Real interest rates represent nominal (or stated) interest rates reduced by the expected impact of inflation.
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7
REITs are pooled investment vehicles that trade like stocks and invest substantially all their assets in real estate and may qualify for special tax considerations. REITs are subject to risks inherent in the direct ownership of real estate. A company’s failure to qualify as a REIT under federal tax law may have adverse consequences for the REIT’s shareholders. REITs may have expenses, including advisory and administration, and REIT shareholders will incur a proportionate share of the underlying expenses.
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8
Sources: Bloomberg L.P. and US Bureau of Labor Statistics, as of December 2022