Beyond Equities: The Case for Commodity Diversification in Volatile Markets

That is exactly what we offer: diversification away from traditional assets.

Hello everyone, I'm Stephanie Stanton with ETF Guide. It is great to see you again. Before we go any further, a few quick reminders: join our ETF guide community by hitting the subscribe button and like button if you've been enjoying our programs. Also, we've got two more links in the description section: a link to USCF Investments Substack feed, plus a link to usfinvestments.com for all things commodities. Without further ado, we want to welcome John Love, the CEO with USCF Investments. Hi, John. It's great to have you.

Hi, Stephanie. Great to be here. Thanks for having me.

You're very welcome. You know, we're going to start off talking about gold. In a year where gold has surged to all-time highs and bond yields remain volatile, how does the USCF Gold Strategy Plus Income Fund, and your ticker there is USG, how does it help investors balance safe haven demand with income generation? And what tradeoffs should they understand?

Well, the way that it balances those two things is it's a strategy that gives you exposure to gold. It does that through futures and through warrants, which are receipts for physical gold. And then we sell options on those gold futures positions to earn income to bring into the portfolio. So what that'll do is in an environment where gold is neutral down or maybe even a gentle up market, the income should add a little bit of oomph to the portfolio. Now in an environment where you've had a runaway market, if you just look at the first couple of weeks of October where gold is just exponentially increasing, it may drag a little bit because those options positions, although they're designed to earn an income, they may offset that gain a little bit.

Conversely, in a down market, a neutral market, even a little bit of an up, you'd have this income on top of the gold return. The nice thing about it is gold is not an income-producing asset, and we've heard from a lot of investors they want gold exposure, but they really wish they could earn some yield on it, and that's the purpose of this fund is to try to give investors a little bit of income along with the gold exposure.

USCF has long emphasized real asset exposure through funds like the USCF Summer Haven Dynamic Commodity Strategy No K1 ETF, and your ticker there is SDCI. So far this year, SDCI is significantly outperforming plain vanilla beta commodity ETF peers by a pretty meaningful margin. So, congrats on that. It's especially impressive given the chaos of tariffs and the geopolitical turmoil that's happening right now. What has contributed to SDCI success and how might investors use it inside their portfolios?

Sure. SDCI is not an active fund, but it uses a systematic rules-based system, rebalances every month. And the goal there is to give investors exposure to commodities that maybe are a little off the beaten path. Just take cocoa for example. It was up 300% last year. A lot of commodity funds either don't have an exposure to cocoa or it's a very small exposure where we equal weight the commodities we hold so we can have a more meaningful exposure to things like cocoa. This year it's cattle that everybody's seen beef prices are up and that's because cattle herds are at a 70-year low. So we have exposure through those rules.

We can kind of get into those commodities that you wouldn't expect, and the rules, what we look at is we're looking at something that indicates to us low inventory, and if inventories relative to demand, if inventory is low relative to demand, that commodity has a higher chance of outperforming over time. So SDCI, the way that investors can use it is absolutely to use it as a core commodity holding as your broad commodity allocation, a diversification strategy. It was designed to give you strong correlation to the traditional commodity indices and be that broad commodity fund, but hopefully offer a little extra in terms of the system and the allocation to different commodities, and we've seen that play out over the years and the fund's been a performance leader and we're very pleased with that.

Good stuff. Shifting gears, the US government has recently taken equity stakes in companies like Trilogy Metals and MP Materials in order to secure domestic supply chains. And that puts ETFs like the United States Copper Index Fund, the ticker is CPER, and USCF Daily Target 2X Copper Index ETF, and that ticker is CPXR, putting these ETFs in the spotlight. So what do these government moves mean for the copper market overall?

Well, the government taking an interest in a private company is always, you know, it's a double-edged sword. Copper being a critical material for US infrastructure and so many industries, it does make sense that the government would take an interest in supporting that industry. Globally over the last 15-20 years there has not been enough investment in capex to produce new copper. The US especially has really low produces really low amounts of copper. We get a lot of it from South America, some from Asia a little bit internally.

It seems like as geopolitics are doing what's happening that it does make sense to try to boost domestic supply. Now the troubling thing is is that it takes a long time to bring new supply online. So it's smart to try to boost that, but it's going to be a while before that starts to add to our portfolio of copper as a country. Demand for copper is rising. It's expected to outpace supply for many years. So even though the government has done this it's going to be a while before that pays off if ever because that copper demand is rising.

So we think the fundamental story for copper is the demand and the fact that there's just not enough supply and new supply won't come online for you know 10-15 years. Most likely it'll start to but to really on a meaningful level it's going to be a while.

Yeah. So, I mean, it sounds like it would be good for a long-term investment then based on what you're saying.

It potentially could be. Copper, you always have to look at the underlying fundamentals of the economy. If there's a recession, demand for copper can slow down a little bit, but unlike past recessions, I think the supply demand equation is very favorable here. There's some other mechanics when you trade single commodities as opposed to a broad strategy. So you do want to educate yourself on it but we do think in terms of favorite commodities looking for the next 5-10 years copper's near the top of our list.

We want to shift now to the USCF midstream energy income fund. Your ticker there is UMI. This fund offers a unique dividend approach to the energy market. How do you differentiate UMI's exposure between upstream producers, midstream infrastructure and downstream refiners and what role does that play in income generation as well as inflation hedging?

Sure. UMI what we're doing it's it is a mid-stream fund. So we are focused on those midstream companies and the nice thing in that space is your upstream you have you have boom and bust cycles. The downstream space you've got margins from refineries things like that. In the midstream space these companies are focused on developing long-term contracts which produce income. We also our portfolio management team on that fund it's an active fund. They are looking for the best companies in the space looking at company fundamentals and trying to pick those companies that are likely to give you the better total returns over time and consistent income.

That's really the differentiator with UMI is picking good companies and that focus on that mid-stream area where hopefully the income is more consistent and you have good solid companies to choose from with strong fundamentals.

So for advisers and allocators who are looking to hedge equity beta or diversify away from traditional 60/40 portfolios, what role do USCF's commodity ETFs play in a modern portfolio building framework? That's really the core question to all of our products. That is exactly what we offer is diversification away from traditional assets. When you think of alternative assets at least I personally think commodities is one of the first one I think of people tend to think privates and real estate and all of that but I really feel like commodities over the long haul we've shown that they or the research has shown that they have long-term returns similar to stocks similar volatility in a broad allocation.

We think it's something that investors should look at given that the correlation to stocks and bonds is very low. When you look at individual commodities some of the other funds we offer the correlation can vary. Some commodities are more correlated with the market cycle. Still not perfect correlation to the stock market but they can be a little more correlated to the market cycle and others can be less such as gold. But broad commodities in general offer you that diversification.

Commodities as an asset class offer that and some individual commodities offer that. So I think you look at a year like 2022 when stocks and bonds were down and commodities were really one of the only things that was up that year and that's the perfect case study for why you would want commodities in the portfolio. And even since then and over this decade so far, commodities have been a solid investment. So we think it's worth looking at and as you said the diversification is the key thing there.

Yeah, absolutely. Especially with everything going on in the world, you've definitely made a case for commodities. Okay, want to talk about this cryptocurrencies are not commodities. That was the title of a recent post on USCF Substack. There's still maybe some confusion about this. So can you elaborate?

Sure. You know, that was kind of a fun piece we put together. A lot of people have asking that question for a while. Is it a commodity? And some people consider it a commodity, others don't. One thing that's happened recently is the regulation, which was uncertain, has shifted to where crypto is starting to be regulated a little more like a commodity. But just because there's futures on something does not make it a commodity. The big difference is obvious: a commodity is tangible. A cryptocurrency is virtual.

So that alone separates it. But I think the main thing you want to look at is what differentiates an asset class. The most important thing I think is that correlation that we've been talking about and commodities give you diversification from equities especially sort of those riskon equities like the magnificent 7 where cryptos have tended to correlate much more strongly with you know tech tech funds with technology stocks magnificent 7. So they're really giving you a very different exposure than commodities in general.

It's true that commodities, you know, you look across the space and cocoa and cotton and crude oil, they don't correlate with each other. Same thing with Bitcoin, but when you look at them together and you look kind of the average correlation of a commodity versus crypto, you're getting a differentiation from commodities that is not the same as crypto. So, I think crypto is its own asset class. Bitcoin is not a commodity. There are futures on it. It is regulated by the CFTC, but there are a lot of things that differentiate it and I think they're two different things that you can use in your portfolio for different purposes and in different ways.

Fascinating stuff. We're going to leave it right there. John Love, thank you so much for joining us today. We appreciate your time.

Thank you very much. Great to be here.

You're very welcome. And subscribe to USCF Investments Substack feed. The link is provided below in the description section. We've also got a link to usfinvestments.com to keep you on top of the very latest investment strategies and ETFs tied to gold, oil, and other top commodities. Well, that does it for today's episode of Spotlight. If you enjoyed the show, tell us in the comments section below and by hitting the subscribe button. I'm Stephanie Stanton with ETF Guide. Thank you so much for watching. We will see you next time.