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Commodities Up for a Solid 2020? ETFs to Benefit

Broad commodities had a decent 2019 on moderate strength in the greenback and decent global growth. Invesco DB Commodity Index Tracking Fund DBC is up 10.5% this year, trailing the S&P 500 (up 27.2%). But things could rebound for the commodity market in 2020 on improved global demand and a preliminary level trade deal between the United States and China.

Investors should note that research firm Goldman Sachs recently upped its 12-month commodity returns forecast by 3% to 6.4%, thanks to an improved outlook for oil. An OPEC-led agreement to cut output further as well as supply concerns in the agriculture sector led to the upside in estimates.

Goldman forecast returns of 1.7%, 4.7% and 6.4% on its S&P GSCI commodity index for the three-months, six-month and 12 months, respectively. Over a one-year period, Goldman predicts returns of 9.1% from energy, 7.7% from precious metals, and 7.9% from the livestock sector.

Inside the Bullish Drivers

Outlook for oil is bullish for 2020. Both investment banks Goldman Sachs and J.P. Morgan acknowledge the effectiveness of the OPEC output cut. J.P. Morgan, in fact, went on to predict that the oil market will be in a deficit next year, by 200,000 bpd. The OPEC has agreed to cut output by a further 500,000 barrels per day from January.

Also, easing of U.S.-China trade tensions, ample policy easing in major developed and emerging economies as well as lower, reduced uncertainty related to Brexit could prop up global growth and boost demand for this liquid commodity. The Fed also hinted at no rate hikes in 2020, which could keep the dollar in check. With most commodities priced-in in the greenback, such a Fed move should prove beneficial for commodities (read: Fed to Not Hike Rates in 2020: ETF Areas to Shine).

Goldman Sachs anaIyst Brian Singer raised the 2020 price target for Brent crude to $63 and $58.50 for WTI, from $60 and $55.50, respectively, “due to more favorable inventories.” J.P. Morgan’s forecast for the Brent crude oil benchmark is $64.50 per barrel for next year, up from the previous projection of $59 per barrel.

China has reportedly agreed to increase imports in 2020 and 2021 by almost $200 billion as part of the initial level trade deal, which includes nearly $40 billion of U.S. agricultural products.China’s farm purchases from the United States would be definitely higher in 2020 from the current pace of about $10 billion annually.

Across the pond, prime minister Boris Johnson won a majority in the U.K. election last week and has vowed to "get Brexit done" by Jan 31 and then cut a new trade deal with the European Union by 2020-end.

If global growth perks up, industrial metals could stage a rebound. Investors should note that palladium had a sizzling 2019 and is up for more gains next year. About 80% of rhodium and palladium demand originates from the global automotive industry and is thus poised for further growth as global economic recovery may drive auto sales (read: Why Palladium ETF Has Soared in 2019).

Against this backdrop, we highlight a few ETFs which could be well positioned amid a bullish commodity market outlook.

iShares S&P GSCI Commodity-Indexed Trust (GSG)

This fund follows the S&P GSCI Total Return Index offering exposure to a broad range of commodities through investments in futures contracts. Energy makes up for nearly 61% of the portfolio, while agriculture and industrial metals roundinh off the next two spots with double-digit exposure.

Invesco DB Commodity Index Tracking Fund (DBC)

This fund tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which delivers returns through an unleveraged investment in the most heavily traded futures contracts on physical commodities, plus the rate of interest on specified T-Bills. The fund is heavy on the energy sector.

United States Brent Oil Fund LP (BNO)

The Brent crude oil looks to track the daily changes in percentage terms of the spot price of Brent crude oil (read: Time to Buy Beaten Down Oil ETFs).

Invesco DB Agriculture Fund (DBA)

The fund follows the DBIQ Diversified Agriculture Index Excess Return Index. The fund had double-digit weights in wheat, coffee, sugar, live cattle, corn, soybeans and cocoa. Though the fund is down year to date, it jumped 7.5% in the past three-month frame.

Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR)

The underlying ETFS Physical Precious Metals Basket Index reflects the daily performance of an investment in a precious metals basket of gold, silver, platinum and palladium.

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United States Brent Oil Fund LP (BNO): ETF Research Reports
 
Invesco DB Commodity Index Tracking Fund (DBC): ETF Research Reports
 
Invesco DB Agriculture Fund (DBA): ETF Research Reports
 
Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR): ETF Research Reports
 
iShares S&P GSCI Commodity-Indexed Trust (GSG): ETF Research Reports
 
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Zacks Investment Research
 
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