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Launched in May, PIMCO Commodity Strategy Active Exchange-Traded Fund (CMDT) offers long-term investors potential for diversification and inflation protection. We have a positive outlook for commodities based on supply constraints, the transition to a net-zero economy, and their historical correlation with inflation. In this Q&A, Michael Haigh, executive vice president and commodities and real assets economist, and Greg Sharenow, managing director and head of PIMCO’s commodity portfolio management group, explain their views.

Q: PIMCO has just launched a commodity exchange-traded fund. Why now?

A: In an uncertain inflationary environment with a more volatile economic outlook, we believe  commodities offer diversification and inflation-protection potential. The recent rebound in prices confirms the importance of holding commodities, in our view.

The fund launch is consistent with PIMCO's history of innovation and market leadership in commodities. We have a long-established mutual fund franchise, and the commodity ETF is a natural extension that responds to investor needs for a beta product that imbeds active management.

Q: What is your near- and long-term outlook for commodities?

A: In the near term, U.S. headline inflation looks likely to moderate, but core inflation has remained stubbornly high. Critically, commodities have tended to benefit from their extremely tight link with both inflation and inflation surprises.

We foresee a mild recession in 2023. History suggests that when spare capacity and investment is limited prior to a recession, supply constraints tend to emerge once demand growth resumes. These conditions exist today, so a long-term investor may view weakness stemming from a mild recession as an opportunity to use commodities to guard against inflation.

Over the longer term, the net-zero transition and deglobalization could add to upside inflationary risks. Transitioning to a net-zero economy will be commodity-intensive. We expect unavoidable bottlenecks as demand outstrips supply, setting commodities on an upward trend in coming years.

Q: What about the energy outlook?

A: In the near term, despite macroeconomic headwinds, petroleum has constructive underlying fundamentals. It is remarkable that in 2022 China experienced a demand recession for oil, yet global demand grew above trend due to growth in developed markets. We expect demand in 2023 will exceed trend growth as the Chinese economy continues to emerge from its zero-COVID policy that ended last December. As growth and travel normalize, we expect gasoline and jet fuel to be the primary beneficiaries, supporting demand despite global manufacturing- and trade-related headwinds.

On the supply side, one of the biggest structural changes stems from slowing growth in U.S. shale production, with reinvestment rates the lowest in 30 years. This ultimately strengthens OPEC’s ability to influence prices, defend against downside price risks, and capture market share. Recent actions to curtail supplies despite below-average inventories benefit investors by keeping the futures market in a state of positive carry.

Over the longer term, current levels of capital investment in energy are insufficient to meet the energy-transition challenge and global demand growth. According to the International Energy Agency and S&P, annual investment in energy must increase from $499 billion in 2022 to $640 billion in 2030, even if demand growth slows and plateaus by the end of the decade (see Figure 1).

Figure 1 shows the rising trend of oil and gas upstream capital expenditures since 2020, in both real and nominal terms, as well as forecasts for 2025 and 2030. In 2020, total capex came to $342 billion, including $300 billion in nominal terms. In 2021, the total rose to $381 billion, including $358 nominal. In 2022, the total was $499 billion, all nominal. The chart projects total capex will be $597 billion in 2025 and $640 billion in 2030. The source is PIMCO, the IEA, and S&P Global Commodity Insights as of 30 April 2023.

Q: Are there opportunities in agriculture?

A: Weather is always a key determinant for agriculture. Starting conditions entering 2023 in the U.S. were bullish for prices as extreme weather caused two years of poor crops and limited inventory accumulation. While we expect crops to rebuild in 2023, good weather will be crucial for the rest of the growing season in the U.S. Climate change also appears to be having adverse effects on supplies of agricultural commodities, which is supportive of prices.

Q: How about metals?

A: Metals, the most sensitive commodity to the shorter-term industrial cycle, face a clear headwind, particularly with the Chinese construction sector lagging. Nonetheless, global inventories for some major industrial metals are at the lowest levels in decades. Longer term, the transition to a net-zero economy will likely be extremely metals-intensive. The proportion of all copper consumption devoted to green energy will grow from approximately 10% now to more than 25% of global demand by 2035, according to an April 2023 J.P. Morgan report.

As the world moves toward cleaner technologies, metals markets will be put to the test because adding supply is a lengthy and capital-intensive process.

Q: Putting it all together, why the commodity ETF?

A: No index perfectly reflects the universe of commodity investments, and considerable room remains to incorporate commodities absent in existing indices. PIMCO Commodity Strategy Active Exchange-Traded Fund (CMDT) employs a holistic, quantitatively driven strategy that seeks to capture multiple and distinct risk-premia drivers of commodity alpha that have tended to deliver above-benchmark performance over time. We believe inefficiencies in the commodity markets leave an active manager considerable room to add value by assembling a basket of commodities with attractive return properties, such as roll yield. With rising interest rates having increased the collateral return in the portfolio, we believe our index-agnostic approach provides investors a potential opportunity to hedge inflation risks and improve prospects of realizing positive returns.

The Author

Michael Haigh

Commodities and Real Assets Economist

Greg E. Sharenow

Portfolio Manager, Commodities and Real Assets

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A word about risk: Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be appropriate for all investors. The fund will seek exposure to commodities through commodity-linked derivatives and through the PIMCO Cayman Commodity Fund CMDT, Ltd., a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands (the “Subsidiary”). The Subsidiary is advised by PIMCO, and has the same investment objective as the Fund. The Subsidiary (unlike the Fund) may invest without limitation in commodity-linked swap agreements and other commodity-linked derivative instruments. Investing in the bond market is subject to certain risks including the risk that fixed income securities will decline in value because of changes in interest rates; the risk that fund shares could trade at prices other than the net asset value; and the risk that the manager's investment decisions might not produce the desired results. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Derivatives and commodity-linked derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Commodity-linked derivative instruments may involve additional costs and risks such as changes in commodity index volatility or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in derivatives could lose more than the amount invested. The Fund is non-diversified, which means that it may concentrate its assets in a smaller number of issuers than a diversified fund.

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