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Thoughts on Global Commodities

It’s been a tough year for farmers, as a recent story in The Wall Street Journal documented 1 .

A worldwide surplus of commodities like corn and soybeans, and the ongoing trade dispute with China, a big importer of U.S. food products, has depressed prices and created uncertainty. And then there’s the weather.Prices for these products have always been subject to cycles of boom and bust, but this time the bust has seemed to last longer than usual. But people have to eat, the global population continues to grow, and lots of resources are finite. It’s not unreasonable to assume that prices will ultimately recover and that the industry will get more efficient as it consolidates.Another possible benefit: global growth, which has been slowing, appears to be leveling off, according to the World Bank2. Jobs and other data coming out of the U.S. have been less than stellar, but not bad. China continues to look for ways to boost its growth, even as trade issues there appear to be on their way to some sort of resolution. The European Central Bank recently reversed course on interest rates, indicating it would be easing instead of tightening. All these actions should be good for growth, and an expanding global economy is one that will need all kinds of resources.There are other reasons to consider exposure to this asset class. Historically, natural resources have exhibited low correlations to traditional stocks and bonds. This suggests there may be diversification benefits from allocating to the asset in a traditional portfolio. Commodities have also shown a historic tendency to do well in the later stages of an economic cycle.Related: Would You Rather Invest in a Unicorn or a Gazelle?Of course, different commodities may be at different points in the cycle, something that argues for maintaining a diversified portfolio. Potential holdings include livestock; precious metals; grains, food, and fiber; energy; industrial metals; timber; water; and coal. These, in turn, can be weighted by factors that include valuation and momentum to optimize the portfolio.Commodities have always been a challenge to invest in efficiently. Many investors use futures contracts to create exposure to commodities but the process of “rolling” the portfolio from expiring contacts to longer dated contracts can be a drag on performance. These commodity funds are often structured as limited partnerships and therefore may be tax inefficient. Also, many commodities funds are weighted by production output or market capitalization however this often leads to over-concentration in oil and precious metals. A thoughtfully constructed ETF can help address these issues. For example, our IQ Global Resources ETF (GRES)invests primarily in global companies that provide exposure to the underlying commodity markets in food, energy, and other sectors and adjusts dynamically to market conditions and to seek to avoid concentration risk. We also include modest short exposures to U.S. and international equity marketsto try to help manage volatility and to seek to increase the correlation of the fund to commodity spot prices.In keeping with our recent series of fund anniversary blogs, GRES turns ten this year, too, in October. Like many of our other ETFs, it was a “first” when introduced, providing investors with a transparent, low cost vehicle for accessing this broad asset class. If you’re looking for the potential benefits of exposure to commodities, it’s a fund worth considering for suitable investors.1. https://www.wsj.com/articles/this-one-here-is-gonna-kick-my-buttfarm-belt-bankruptcies-are-soaring-11549468759?mod=searchresults&page=1&pos=72. https://www.worldbank.org/en/news/press-release/2019/01/08/darkening-prospects-global-economy-to-slow-to-29-percent-in-2019-as-trade-investment-weaken