Commodity ETFs tumble on recession worries, but catch a rally on ‘Reinflation Day’

Exchange-traded funds that invest in commodities have taken a beating lately, eroding this year’s big gains for some while others are down so far in 2022.

ETFs focused on energy, metals and diversified commodities have suffered as investors have worried that the U.S. may be heading for a recession. 

For example, the VanEck Oil Services ETF
OIH,
+5.45%,
United States Oil Fund LP
USO,
+4.04%,
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF
PDBC,
+3.99%,
Invesco DB Commodity Index Tracking Fund
DBC,
+4.07%
and First Trust Natural Gas ETF
FCG,
+6.34%
have all seen a big drop over the past week and month, according to FactSet data. Shares of the Global X Copper Miners ETF and iShares MSCI Global Metals & Mining Producers ETF have also seen steep recent declines.

The “tremendous pullback in cyclical commodities” such as copper and oil reflects investors starting to price in a recession, said Robert Minter, director of ETF investment strategy at abrdn, by phone. “If we don’t get one, we’re back to no spare supply, and very, very low inventories.”

The “commodity conflict” is that investors have been selling commodities due to worries over increased odds of a recession, but low inventories of oil and industrial metals suggest prices will eventually rise—and that means it may be a good time to buy instead, according to Minter. 

The abrdn Bloomberg All Commodity Strategy K-1 Free ETF
BCI,
+3.72%
has dropped about 16% in the past month, while the abrdn Bloomberg Industrial Metals Strategy K-1 Free ETF
BCIM,
+1.20%
has tumbled around 20%, according to FactSet data, at last check. But both funds were up in Thursday afternoon trading, along with several other commodity ETFs.

“The best way to describe today is it is ‘Reinflation Day,’” said Louis Navellier, chief investment officer at Navellier, in emailed comments Thursday. “There was a fear that the global economy will grind to a halt, even though China is opening up, and that caused a mini commodity crunch on both food and energy,” he said. “But today, prices are back up very sharply.”

Read: Oil prices end higher after 2-day rout pushed U.S. crude into bear market below $100 a barrel

Shares of the Global X Copper Miners ETF
COPX,
+6.24%
were up around 6% Thursday afternoon, paring its losses over the past month to around 28%, according to FactSet. The fund is down around 19% this year, the data show, at last check.

The iShares MSCI Global Metals & Mining Producers ETF
PICK,
+4.45%
has seen a similar decline so far this year, down around 17% after plunging more than 26% in the past month, according to FactSet data, based on Thursday afternoon trading levels.

“Copper
HG00,
+4.01%
is most exposed to an economic slowdown and prices could fall below $6,000/t ($2.72/lb) in the coming months in our base case,” wrote commodity strategists at Bank of America in a BofA Global Research report dated July 6. “If Europe runs out of gas, a risk, prices could decline to $4,500/t ($2.04/lb).”

The strategists pointed to disruption from the Russia-Ukraine war and said “tight energy markets” are the most “pressing issue.” They warned “if Europe runs out of gas this winter, this would cause a very destructive downturn.”

Energy funds including the First Trust Natural Gas ETF, VanEck Oil Services ETF and United States Oil Fund LP have tumbled over the past month. The First Trust Natural Gas ETF and VanEck Oil Services ETF each have dropped around 29% over that period, while the U.S. Oil Fund has slid more than 14%, FactSet data show, at last check.

Still, all three funds have soared this year as energy prices climbed, with the U.S. Oil Fund skyrocketing more than 41% so far in 2022, according to FactSet data. The VanEck Oil Services ETF is up more than 20% this year, while First Trust Natural Gas ETF has gained around 27%.

As usual, here’s your look at the top and bottom performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

…the bad

New ETFs

Global X ETFs announced July 6 that it launched two actively-managed exchange-traded funds with options-based strategies: Global X Interest Rate Hedge ETF
IRHG,

and the Global X Interest Rate Volatility & Inflation Hedge ETF
IRVH,
.
The interest rate hedge ETF is “designed to benefit when rates rise,” Global X said. The interest rate volatility and inflation hedge ETF seeks to profit “from periods of market stress when interest rate volatility increases, while also providing inflation-protected income,” according to the announcement.

Weekly ETF reads