Commodities Beat Most of the Market in 2024 So Far

Despite inflationary concerns weighing down on consumption outlook in the Western Hemisphere, the S&P 500 (ticker: SPX) has been rising throughout the course of the Year Till Date (YTD). However, this tide doesn’t necessary raise all boats in quite the same way: “tech” has been attracting a preponderance of investor attention. Furthermore, tech stocks have the largest collective weight among the different types of companies. How these two fact patterns are affecting the index becomes all the more evident when considering the S&P 500 Ex-Information Technology & Communication Services (ticker: SPXXTTSP) – which excludes the two sectors where most “tech” stocks reside – and the S&P 500 Top 50 (ticker: SP5T5) – which simply considers the top 50 stocks in the index.

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Source: Leverage Shares analysis

When divested of most “tech” stocks, the remaining constituents of the S&P 500 underperform relative to broad market. Concurrently, the tech-heavy Top 50 of the S&P 500 significantly outperforms the broad market.

This implies that purchasing the leading constituents of the broad market is a better proposition than the broad market. However, there is a matter of diversification. Instead of equities, commodities have provided an edge via market-beating behaviour in the year. To indicate this, there are four fully-collateralised UCITS-eligible Exchange-Traded Commodities (ETC) that European investors can tap into:

The Copper ETC (CULS) which provides a passive total return exposure to U.S.-listed copper futures;
The Natural Gas ETC (NGLS) which provides a passive, total return exposure to front-month Natural Gas futures traded on NYMEX;
The Brent Oil ETC (1BRN) which provides a passive, total return exposure to front-month Brent Crude Oil futures traded on ICE
The WTI Oil ETC (WTI) which provides a passive, total return exposure to front-month WTI Crude Oil futures traded on NYMEX

When considered against the Top 50 of the broad market as well as the bulk of the market minus “tech”, there are some clear outperformers in the commodities space.

Source: Leverage Shares analysis

As of the 5th of April, Copper outperforms the “ex-tech” market by nearly 2.5% while both Brent and WTI delivered more than 11% in excess returns over the Top 50 constituents of the market. A “warmer than usual” winter in the Northern Hemisphere generally helped tamp down gas prices while inventory levels stayed high. However, there have been a number of periods in the YTD wherein holding Natural Gas on a tactical basis would have yielded substantially higher returns than holding the market in any of the iterations shown.

On an overall basis, the Oil ETCs have shown the most consistent level of performance. This is largely attributable to the fact that OPEC+ oil producers have maintained supply cuts until June (at least) while robust consumption in India, Europe and China pushes up demand. While an oil play seems to have a substantial use case, there is another factor that could be used in the selection of which instrument to use. For instance, if Brent Futures contracts listed in London (LCOM4) were to be compared to the continually-rolled Oil ETCs 1BRN and WTI, the latter outperform the futures contracts themselves.

Source: Leverage Shares analysis

Despite 1BRN and LCOM being built on the same fuel type, the former has delivered 1.4% in excess returns relative to the latter in the YTD. In other words, there’s always potentially cash being left on the table if the market participant isn’t angling for physical delivery of the underlying but is investing in the futures contracts outright instead of the ETC for a trajectory-driven play.

For professional investors in Europe interested in buying exposure to consumer consumption via commodities, making trajectory plays or seeking diversification to their equity portfolios, these ETCs are highly-viable solutions. Given that they’re also priced reasonably, these ETCs are attractive even when seeking to scale up or scale down exposure.

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