During certain periods over the past year, certain commodities may have seen a decline in price due to the dynamic nature of supply, demand, and investor sentiment.
Although underperformance for any asset is possible over a specific time frame, it may present an opportunity to exercise effective tax management through a practice known as tax-loss harvesting. Tax-loss harvesting may allow investors to make prudent use of unrealized losses to lower their tax liabilities.1
What is tax-loss harvesting?
Tax-loss harvesting is the act of selling securities in a taxable account that have decreased in value to “harvest” a capital loss for tax purposes. There are two potential benefits of selling a security at a loss. First, investors can use realized losses to offset realized gains in their portfolio, effectively reducing their tax liability. Second, investors may be able to use the sale proceeds to reinvest in a similar but more diversified position and maintain exposure as desired.
Wash sale caveat: Investors who wish to employ a tax-loss strategy should be aware of the wash sale rule, which forbids the purchase of a substantially similar security or acquiring a contract or option to do so within 30 days before or after the sale.
What potential benefits can commodities provide?
When implementing a tax-loss strategy, investors may want to maintain longer-term exposure to the commodity asset class because of the following reasons.
Broad commodities may offer investors potential diversification benefits. The asset class tends to have a low correlation to other major asset classes such as stocks, bonds, and other alternatives. There are even potential diversification benefits within the broader commodities asset class. A gold investor may see diversification benefits from owning a basket of metals such as gold, silver, platinum, and palladium, given their differentiated supply and demand characteristics. Sub-categories of commodities such as industrial metals, agricultural products, livestock, and energy tend to have low correlations to one another too. Amid heightened volatility in the markets, there are more reasons than ever for investors to ensure they have a properly diversified portfolio that holds major asset classes including commodities.
Investors can then potentially reinvest the proceeds into a diversified commodities-focused exchange-traded fund (ETF). A diversified commodities ETF may offer lower fees and improve risk adjusted returns, while maintaining a diversified asset allocation. While oil, for example, may get a lot of the headlines, other commodities like copper and wheat can offer investors potential benefits as well.
Commodity prices can be cyclical when demand drives the narrative. Depending on where they are in the cycle, this may offer investors an attractively priced buying opportunity. Commodity prices can also be driven by supply dynamics like those we have experienced in recent years. In today's market, commodity value is being driven in part by demand and supply dynamics, with low inventories in oil, base metals, and agriculture coupled with rising demand. Tight supply, especially for metals where immense time, funding and permits are required to establish new mines, could also support higher commodity prices.
Commodities and precious metals have traditionally been a strong hedge against rising inflation. Commodities that are widely used such as oil, often generate that inflation. As an example, the price of oil rose 59% in 2021 as economies re-opened after the pandemic, contributing to inflation over the same period.
What potential benefits can an ETF provide?
As previously mentioned, to the extent investors use tax-loss harvesting, they may be able to use the proceeds to reinvest in a similar but more diversified position to maintain asset class exposure. The ETF structure may be well-suited to offer a more diversified solution to help implement this strategy.
Both ETFs and mutual funds may be used to gain additional diversification from a position being sold for the purpose of harvesting a tax loss. However, ETFs are generally considered to be lower cost and more tax efficient relative to competing mutual funds. Most broad-based ETFs make very low (if any) capital gains distributions compared to mutual funds with similar investment approaches.
- Declines in certain commodities may provide investors with the opportunity to employ effective tax management strategies such as tax-loss harvesting by replacing the specific commodity with broader exposure
- ETFs may be a potentially efficient tool in managing taxes
- Investors can use the proceeds of a tax-loss sale to reinvest in a similar but not identical position to maintain the desired asset class exposure outside of the 30-day period before or after the sale
1 abrdn and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
An investor should consider the investment objectives, risks, charges, and expenses of the ETFs carefully before investing. To obtain a prospectus containing this and other important information, call 844-ETFS-BUY (844-383-7289) or visit www.abrdn.com/us/etf. Read the prospectus carefully before investing.
Fund Risk: There are risks associated with investing including possible loss of principal. Commodities generally are volatile and are not suitable for all investors. There can be no assurance that the Fund's investment objective will be met at any time. The commodities markets and the prices of various commodities may fluctuate widely based on a variety of factors. Because the Fund's performance is linked to the performance of highly volatile commodities, investors should consider purchasing shares of the Fund only as part of an overall diversified portfolio and should be willing to assume the risks of potentially significant fluctuations in the value of the Fund.
The Fund employs a “passive management” – or indexing – investment approach designed to track the performance of the Index. The Fund will generally seek to hold similar interests to those included in the Index and will seek exposure to many of the commodities included in the Index under the same futures rolling schedule as the Index. The Fund will also hold short-term fixed-income securities, which may be used as collateral for the Fund's commodities futures holdings or to generate interest income and capital appreciation on the cash balances arising from its use of futures contracts (thereby providing a “total return” investment in the underlying commodities).
Through holding of futures, options and options on futures contracts, the Fund may be exposed to (i) losses from margin deposits in the case of bankruptcy of the relevant broker, and (ii) a risk that the relevant position cannot be close out when required at its fundamental value. In pursuing its investment strategy, particularly when rolling futures contracts, the Fund may engage in frequent trading of its portfolio of securities, resulting in a high portfolio turnover rate.
As a “non-diversified” fund, the Fund may hold a smaller number of portfolio securities than many other funds. To the extent the Fund invests in a relatively small number of issuers, a decline in the market value of a particular security held by the Fund may affect its value more than if it invested in a larger number of issuers. The value of Shares may be more volatile than the values of shares of more diversified funds.
During situations where the cost of any futures contracts for delivery on dates further in the future is higher than those for delivery closer in time, the value of the Fund holding such contracts will decrease over time unless the spot price of that contract increases by the same rate as the rate of the variation in the price of the futures contract. The rate of variation could be quite significant and last for an indeterminate period of time, reducing the value of the Fund.
Changes in the laws of the United States and/or the Cayman Islands, under which the Fund and the Subsidiary are organized, respectively, could result in the inability of the Subsidiary to operate as intended and could negatively affect the Fund and its shareholders.
To the extent the Fund is exposed directly or indirectly to leverage (through investments in commodities futures contracts) the value of that Fund may be more volatile than if no leverage were present.
In order to qualify for the favorable U.S. federal income tax treatment accorded to a regulated investment company (“RIC”), the Fund must derive at least 90% of its gross income in each taxable year from certain categories of income (“qualifying income”) and must satisfy certain asset diversification requirements. Certain of the Fund's investments will not generate income that is qualifying income. The Fund intends to hold such commodity-related investments indirectly, through the Subsidiary. The Fund believes that income from the Subsidiary will be qualifying income because it expects that the Subsidiary will make annual distributions of its earnings and profits. However, there can be no certainty in this regard, as the Fund has not sought or received an opinion of counsel confirming that the Subsidiary's operations and resulting distributions would produce qualifying income for the Fund. If the Fund were to fail to meet the qualifying income test or asset diversification requirements and fail to qualify as a RIC, it would be taxed in the same manner as an ordinary corporation, and distributions to its shareholders would not be deductible by the Fund in computing its taxable income.
Shares in the Trust are not FDIC insured and may lose value and have no bank guarantee. Investor shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Ordinary brokerage commissions may apply.
Investors buy and sell shares on a secondary market (i.e., not directly from trust). Only market makers or "authorized participants" may trade directly with the fund, typically in blocks of 50k to 100k shares.
ALPS Distributors, Inc. is the distributor for the abrdn ETFs.
ALPS is not affiliated with abrdn.
Bloomberg®, Bloomberg Commodity Index Total ReturnSM, Bloomberg Commodity Index 3 Month Forward Total ReturnSM and Bloomberg Industrial Metals Subindex Total ReturnSM are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by abrdn ETFs Advisors LLC. Bloomberg is not affiliated with abrdn ETFs Advisors LLC, and Bloomberg does not approve, endorse, review, or recommend abrdn Bloomberg All Commodity Strategy K-1 Free ETF, abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF and abrdn Bloomberg Industrial Metals K-1 Free ETF. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Bloomberg Commodity Index Total ReturnSM, Bloomberg Commodity Index 3 Month Forward Total ReturnSM and Bloomberg Industrial Metals Subindex Total ReturnSM.