Russia’s invasion of Ukraine is raising the risk of U.S. inflation shooting up to 10 from 7.5% as of January, which would be its highest rate since October 1981. “There’s a higher probability today of headline inflation overshooting the consensus and last year’s number—resulting in inflation perhaps touching 10%,” said Daniel Tenengauzer, head of markets strategy for BNY Mellon in New York.

The unfolding Russia-Ukraine crisis increases the risk of stagflation, which is defined as persistent high inflation combined with high unemployment and stagnant demand in a country’s economy, because Russia is a ‘commodity superstore.’ Russia is a significant exporter of oil and gas, industrial metals, precious metals, fertilizers, and soft commodities such as cereals. So, the prices of these commodities are rising. Furthermore, Russia and Ukraine combined account for 25% of global wheat  and Ukraine alone for 13% of corn exports. While some analysts think that Russia would not want to risk its position as a reliable supplier, some also believe the Russian leader could play the ‘commodity export card’ in pursuit of his current plan.

Because commodities have a history as inflation hedges, we think commodity ETFs Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), Invesco DB Commodity Index Tracking Fund (DBC), and iShares U.S. ETF Trust iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT) could be ideal additions to your portfolio amid the stagflation risks.

Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)

PDBC offers exposure to commodity futures without the tax hassle of a K-1, which some investors avoid. The fund is actively managed and tries to avoid “negative roll yield,” a well-known problem in  passive commodity funds that can substantially erode returns over time.

With $6.59 billion in assets under management, PDBC’s top holdings include Invesco Government & Agency Portfolio (AGPXX) with a 58.56% weighting, Invesco US Dollar Liquidity Portfolio (STUSDIC), with a 15.43% weighting, and the United States Treasury Bill (expiry August 2022) at  5.51%. Over the past month, its fund flows have come in at $915.77 million. It has  24 holdings and a  $15.80 NAV as of February 25. Also, PDBC’s 0.59% expense ratio compares to the 0.76% category average.

The fund pays an $1.76 annual dividend, which yields 11.06% at the prevailing share price. PDBC’s average four-year dividend yield stands at 4.05%. Its dividend payouts have increased at a 261.9% CAGR over the past three years. The fund has gained 13% year-to-date to close the last trading session at $15.89. It has a beta of 1.19.

PDBC’s strong fundamentals are reflected in its POWR Ratings. The fund has an overall A rating, which equates to Strong Buy in our proprietary rating system. It has a Trade, Buy & Hold, and Peer grade of A. Among the 115 ETFs in the A-rated Commodity ETFs group, PDBC is ranked #2. Click here to access all the PDBC ratings.

Invesco DB Commodity Index Tracking Fund (DBC)

DBC is one of the largest and most popular ETF options for investors seeking broad-based commodity exposure. DBC can add valuable return enhancement and diversification benefits to traditional stock-and-bond portfolios. The ETF invests in futures contracts.

DBC’s major holdings include Invesco Government & Agency Portfolio (AGPXX) with a 26.15% weighting, Crude Oil Dec21 (CLF2.L) with a 7.74% weighting, and Gasoline Rbob Fut Dec21 at  7.45%. It has $3.60 billion in assets under management. Over the past month, DBC’s fund flows have amounted to  $370.54 million, while its NAV was $23.34 as of February 25. DBC has a 0.87% expense ratio, which  compares with a 0.76% category average.

Over the past year, DBC has gained 37.3% to close the last trading session at $23.47. The fund has gained 13% year-to-date. DBC has a beta of 1.21.

The ETF has an overall A grade, which equates to Strong Buy in our proprietary rating system. It also has an A grade for Trade, Buy & Hold, and Peer. The fund is ranked #3 in the Commodity ETFs  group. To get all DBC ratings, click here.

iShares U.S. ETF Trust iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT)

COMT seeks to track the investment results of an index composed of a broad range of commodity exposures with enhanced roll selection on a total return basis.

COMT has $3.08 billion in assets under management. As of February 25, the BlackRock Cash Funds Treasury SL Agency (XTSLA) was COMT’s  the top holding, with an 8.12% weighting, followed by Cash Collateral USD BZUFT (BZUFT) and Treasury Bill (CMB) with 6.52% and 3.62% weightings, respectively. It has a total of 135 holdings. Its fund flows came in at $71.22 million over the past month, and it has a $31.37 NAV. The fund’s 0.48% expense ratio is significantly lower than the 0.76% category average.

The ETF pays a $5.49 dividend annually, yielding 15.51% at the current price. Its four-year average dividend yield stood at 5.49%. Furthermore, COMT’s dividends have increased at a 15.6% CAGR over the past three years and 103.1% CAGR over the past five years. The fund has gained 14.5% over the past year and 14.7% year-to-date. It has a 1.18 beta.

It’s no surprise that COMT has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. In addition, it has an A grade for Trade and Buy & Hold and a B grade for Peer. It is ranked #4 in the Commodity ETFs group. Get all COMT ratings here.

PDBC shares were trading at $16.17 per share on Monday afternoon, up $0.28 (+1.76%). Year-to-date, PDBC has gained 15.01%, versus a -9.21% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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