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Hedging Against Inflation With Industrial Metals ETFs

Many investors shun commodities because they don’t offer cash flow or grow in value. But during rising interest rate environments, commodities often see a surge of interest among investors seeking to hedge against inflation. For instance, industrial metal prices tend to rise alongside inflation as long as demand remains strong.

Let’s look at whether industrial metals ETFs are effective inflation hedges and some new options for investors to consider.

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Striking a Balance

The price of industrial metals, like copper, nickel, and aluminum, rose sharply during the beginning of the year. With inflation on the rise, producers passed on higher mining costs to their customers through increased metal prices. And in that sense, industrial metals have effectively hedged against inflation.

After reaching their highs in March, prices plummeted lower by mid-year amid growing fears of a recession. For instance, the S&P GSCI Industrial Metals Index is down more than 17% since January. If rising energy prices destroy consumer demand, the market could be flooded with excess inventories, leading to lower prices.

There are also signs of ebbing demand. In particular, China (the world’s largest consumer of industrial metals) saw its factory sector slip into contraction territory in August after new orders fell. Moreover, a simmering real estate crisis could have significant long-term implications on the country’s economy.

How to Invest

Investors have many options for investing in precious metals, but industrial metals are trickier. Fortunately, Aberdeen launched a new exchange-traded fund (ETF) that provides broad exposure to industrial metals in a single fund. The Bloomberg Industrial Metals Strategy K-1 Free ETF (BCIM) invests in aluminum, copper, nickel, and zinc.

In addition to hedging against early inflation, Aberdeen’s Head of ETFs, Steve Dunn, points out that the same metals play a significant goal in renewable energy megatrends. The metals appear in electric vehicles, wind turbines, solar panels, grid batteries, and carbon capture systems, making it a unique way to capitalize on two growth trends.

With an extra focus on renewables, the secular growth that the Inflation Reduction Act promises to deliver to renewable energy investments could offset the impact of a potential recession over the coming year. As a result, investors may be better off in industrial metals than precious metals and some other inflation hedges.

The Bottom Line

Industrial metals provide an attractive hedge against inflation but are vulnerable to underlying economic growth trends. Funds like BCIM enables investors to participate in these trends—along with growth in renewables—but an economic downturn could prove painful nonetheless.

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Oct 12, 2022