How to Profit from the Fed´s Money Printing Policies
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The cards are on the table; it seems like we will have large amounts of money flowing into the US economy for a very long time, and this will have important implications for global assets prices. Needless to say,it will also affect your portfolio.
There are some real questions regarding how positive such measures will be for actual economic growth, but one effect of all this liquidity is much clearer: It can be very bullish for commodities. If we print a lot of US Dollars - Euros and Yens too, by the way - all these currencies will be losing value against commodities over time. The supply for money is growing much faster than the supply of gold, metals, oil or food, and this means than commodities should increase in value versus currencies over time.
The risk of rising inflationary pressures is increased with further monetary easing, and commodities are one of the best hedges a portfolio can have in such circumstances. Both from an offensive and defensive perspective, there are solid reasons to consider adding exposure to commodities under current monetary measures.
Power Shares DB Commodity Index Tracking (NYSEMKT: DBC) is a very popular ETF which provides exposure to a diversified basket of 14 commodities by investing in futures contracts. Investing in futures is not the same as holding the physical product, and there can be differences in returns due to the additional costs implied by operating in these assets.
But DBC utilizes an active strategy to minimize those costs by choosing the most convenient futures contract at each point of time, and it has done a good job at efficiently tracking commodity prices over the years. This ETF tracks the Deutsche Bank Liquid Commodity Index which includes energy (55%), industrial metals (12.5%), precious metals (10%), and agricultural products (22.5%). Overall, DBC is a solid, diversified, instrument to benefit from rising commodity prices.
The agro sector is one particularly interesting part of the commodity spectrum. The incorporation of China and India to global trade markets has increased demand for these products substantially, and the trend is still in its first stages. Also, global arable land is decreasing as result of urbanization in emerging markets, meaning that more food will need to be produced with fewer resources.
PowerShares DB Agriculture Fund (NYSEMKT: DBA) invests in a basket of 10 agricultural commodity futures contracts, including feeder cattle, cocoa, coffee, corn, cotton, lean hogs, live cattle, soybeans and sugar. Unfortunately, the discrepancies between spot commodity prices and the returns provided by this instrument have been material in the past, so it’s a far from ideal way to profit from raising agro commodity prices.
An imperfect, but yet attractive, way to make a bet in this sector can be by investing in agribusiness companies via an ETF like Market Vectors Agribusiness ETF (NYSEMKT: MOO). This instrument holds a portfolio of 25 companies benefitting from increasing acgriculture prices, like seed producers Monsanto and Syngenta, fertilizer companies like Potash or Agrium and even machinery stocks like Deere and CNH.
An investment in this ETF obviously won't yield the exact same result as holding the commodities themselves, but all these companies benefit from higher profitability in the farming business, which usually means more spending by farmers as they capitalize higher prices for their products. Also, many of the names in this portfolio have been affected by the serious drought in the US, so they have a considerable upside potential once the industry starts recovering from climatic problems.
Those who have a higher tolerance for volatility and want instruments with big appreciation potential may want to consider buying some SPDR Gold Trust (NYSEMKT: GLD), which tracks the price of gold. This ETF holds the actual physical commodity, so you don´t need to worry about distortions coming from the futures markets when buying GLD.
Gold has many proponents and detractors when it comes to its merits as a long term investment, but it has a very solid track record at providing returns in times of rising inflation. However, an alternative like SPDR S&P Metals and Mining (NYSEMKT: XME) can be a less risky possibility for those who prefer commodity producing companies as opposed to investing in a metal without much industrial use.
Companies like Billiton, Rio Tinto, Anglo American and Barrick Gold are included in this portfolio, so XME has a considerable exposure to gold miners, but also to other metals like copper, nickel and iron ore. Once again, this is not the exact same as directly investing in the commodities, but miners' profitability depends to a large extent on the prices for their products, so this ETF is strongly correlated to commodity prices.
There are many uncertainties regarding the global economic scenario over the following years, but one thing looks quite clear: liquidity will be abundant. Global money supply is one of the most important determinants of commodity prices, so it makes a lot of sense to position your portfolio according to this powerful force.
acardenal holds shares of MOO. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.