PDBC: Commodities In Q2 2024 And Looking Forward To The Rest Of This Year (NASDAQ:PDBC)

Commodities are global assets. While production is in regions where the earth is mineral-rich, or the soil supports agricultural product growth, consumption is ubiquitous. The demand side of raw materials’ fundamental equation continues to grow, with over eight billion mouths to feed and lives to power and shelter.

The bifurcation of the world’s nuclear powers and the growing number of conflicts have caused increasing tariffs, sanctions, and other trade barriers, threatening to alter fundamental supply and demand equations.

Meanwhile, technical trends in the commodities asset class turned decidedly higher from the 2020 lows, and the bullish paths of least resistance remained higher over the past four years. Inflationary pressures have caused production costs to rise, and technological advances have increased the demand for critical raw materials.

As the markets head into the second half of 2024, the bullish case for commodities remains firmly intact. The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ:PDBC) provides raw material exposure to portfolios without the same tax consequences as the Invesco DB Commodity Index Tracking Fund ETF (DBC).

Commodity prices in Q2 2024

The commodity asset class consisting of 29 primary commodities traded on U.S. and U.K. exchanges moved 3.38% higher in Q2 2024. Four of the six sectors posted gains in Q2. Base metals led the asset class with an 11.24% gain. The energy commodities composite rose 8.78%, and precious metals posted a 7.24% increase. Animal proteins edged 0.66% higher on the back of gains in cattle and declines in lean hog futures. Grains led on the downside, with a 4.86% decline, and the soft commodities composite, which led the asset class on the upside in 2023 and Q1 2024, fell 2.79% in Q2.

From the end of March through June 2024, twenty products posted gains, with nine posting double-digit percentage gains. The list of gains is as follows:

Twenty commodities posted losses in the second quarter in the broader group of commodities:

As the charts show, nine commodities posted double-digit percentage gains in Q2, while only six posted double-digit percentage losses. Copper, gold, frozen concentrated orange juice, and cocoa futures rose to new record highs in the second quarter.

Commodity prices over the first half of 2024

The commodity asset class consisting of 29 primary commodities traded on U.S. and U.K. exchanges moved 10.41% higher over the first six months of 2024. Five of the six sectors posted gains in the first half of this year. Soft commodities led the asset class with a 26.76% gain. The animal protein composite rose 19.49%, and base metals posted an 11.51% increase. Energy moved 10.98% higher, and precious metals rose 5.79%. Grains were the worst-performing sector, with a 12.06% decline.

From the end of 2023 through June 2024, twenty-four products posted gains, with seventeen posting double-digit percentage gains. The list of gains is as follows:

Twenty-four commodities posted gains over the first half of 2024. There were seventeen double-digit percentage gainers over the period.

Sixteen commodities posted losses over the first half of 2024. There were nine double-digit percentage losers over the period.

Cocoa, FCOJ, gold, and copper, the four commodities that rose to all-time highs in Q2 2024, posted double-digit percentage gains over the first half of 2024, with cocoa leading the asset class on the upside with a six-month over 84% gain. Grains and lumber futures dominated the markets that declined but had risen to multi-year or all-time highs in 2021 and 2022 and continued to correct lower over the first half of this year.

Ominous issues could be facing markets in the second half of this year

Ironically, the composite of the leading commodity prices increased over 10% from the end of 2023 through the end of Q2 2024, given inflation indicators have declined and are approaching the Fed’s 2% target. The divergence does not stop there, as high interest rates and a strong dollar tend to weigh on commodity prices. The dollar index rose by 1.22% in Q2 and was 4.47% higher since the end of last year. The U.S. 30-year Treasury bond futures fell 2.31% in Q2 and moved 5.74% lower over the first six months of this year. Commodity prices ignored a stronger dollar and higher rates in a departure from traditional trading patterns. The strength in raw materials could indicate the declining significance of the U.S. dollar and bond market in the current geopolitical environment.

As the commodities markets move into the second half of 2024, the summer could give way to a wild fall and winter. Market liquidity tends to decline during the summer as market participants vacation, causing volume and open interest declines. Lower liquidity often leads to higher price variance. Meanwhile, the following factors could cause wild price swings and unexpected events over the coming months:

• The wars in Ukraine and the Middle East continue to destabilize the geopolitical landscape.
• Relations between the U.S./Europe and China/Russia have deteriorated to levels where isolated or widespread conflicts could be inevitable.
• European elections have shifted towards the political right, with the most recent victories in France.
• The November U.S. election will determine the path of domestic and international policy over the coming years. The late June debate was a disaster for the incumbent president.
• U.S. interest rates have peaked, and the Fed will wait until inflation validates a move toward the 2% target before significantly easing monetary policy.

While these factors will determine the path of least resistance of commodity prices and markets across all asset classes, any surprises could cause significant volatility over the second half of 2024.

Expect volatility- Trading instead of investing

Expect a continuation of volatility in markets in Q3 2024 and beyond. Discipline, a logical risk-reward approach using stops, and flexibility are critical elements for success in the world of commodities. As we witnessed in 2008, 2020, and 2022, surprises will likely cause the most significant price variance in Q3 2024 and over the coming quarters.

Attention to risk-reward and discipline will allow you to survive very volatile market conditions. Take advantage of opportunities, but have a plan, write it down, and stick to that plan. Do not allow trades to become long-term investments because prices move contrary to expectations. Remember that you are always long or short at the current market price, not at the original execution price. Adjust risk-reward based on the latest price. Moreover, develop logical risk-reward levels that reflect the current price variance levels to improve the odds of success. Volatile markets create a paradise of trading opportunities but can also be a nightmare for passive investors.

PDBC- The no K-1 ETF that provides commodity exposure

I remain bullish on commodity prices going into the second half of 2024. The legacy of the government stimulus and central bank liquidity created by the 2020 global pandemic are inflationary pressures beyond the central bank’s monetary policy reach. Moreover, the bifurcation of the world’s nuclear powers creates substantial trade barriers through sanctions, tariffs, and bans that distort the flow of raw materials around the globe. Commodities are global assets highly sensitive to the state of the geopolitical landscape.

The Invesco Optimum Yield Diversified Commodity Strategy No-K1 ETF (PDBC) is a diversified product providing exposure to raw material markets. PDBC’s fund profile states:

As the profile states, PDBC invests in derivatives in the commodity market’s energy, metals, and agricultural sectors. At $14.21 per share on July 5, PDBC had $5.15 billion in assets under management. PDBC trades an average of over two and one-half million shares daily and charges around a 0.60% management fee.

The chart shows that PDBC rose 1.3% in Q2, moving from $13.87 at the end of Q1 to $14.05 per share at the end of June 2024. Since the end of 2023, PDBC posted a 5.6% gain. PDBC underperformed the commodities composite that rose 3.38% in Q2 and 10.41% over the first six months of 2024 because of several factors:

• Grains underperformed the commodities asset class.
• Natural gas was responsible for most of the energy sector gains.
• PDBC had no exposure to cocoa or FCOJ futures, the commodities that posted the most significant gains in 2024.

The top holdings of PDBC include:

PDBC is a diversified commodity ETF product with no K-1 that sometimes outperforms and underperforms the commodities composite at other times. However, PDBC adds significant raw material exposure to portfolios. Given the current economic and geopolitical landscapes, exposure to commodities has been profitable since the 2020 lows, and I expect that trend to continue.