This ETF Captures Upside in Agriculture and Provides an Inflation Hedge

Commodities have literally been a hot commodity in the capital markets given inflation fears midway through the year, and investors can capture this upside and hedge inflation with the Invesco DB Commodity Index Tracking Fund (DBC).

The Federal Reserve may have tamped down inflation fears when they indicated no rate raises until 2023, but that doesn’t mean commodities no longer have a place in a portfolio. Aside from being an inflation hedge, commodities can give investors access to assets that are uncorrelated to the broad equities market.

Commodities typically march to the beat of their own drum, giving a portfolio much-needed diversification. When interest rates do eventually rise, commodity prices will move higher as well and provide this hedging component.

Per the fund’s description, DBC seeks to track changes, whether positive or negative, in the level of the DBIQ Diversified Agriculture Index Excess Return™ (DBIQ Diversified Agriculture Index ER or Index) plus the interest income from the Fund’s holdings of primarily US Treasury securities and money market income less the fund’s expenses.

Up close to 30% for the year, DBC is designed for investors who want a cost-effective and convenient way to invest in commodity futures. The Index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities.

DBC data by YCharts

Inflation Hitting a Peak?

Inflation fears have been racking the markets with volatility for the past few months, but they may have subsided. Still, having exposure to funds like DBC shield investors from additional volatility should the inflation threat persist.

“I’ve got good news for you: The stock market, which is pretty correct on these kind of matters, is saying that commodity inflation has already peaked,” said CNBC’s “Mad Money” host Jim Cramer. “Forget transitory, the market’s saying it’s pretty much over.”

“Sure, the market could be wrong, but if you were worried about totally out-of-control inflation, that possibility has been taken off the table,” Cramer added. “You’re looking at a sudden collapse in every stock related to commodities at the same time that long-term interest rates are crashing — that wouldn’t happen in a world with wild and crazy inflation.”

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