Previously, investors who were interested in commodities had to set up a commodity brokerage account, invest in equity producers, or start prospecting, but now, the average retail investor can look for commodity exchange traded fund options.
According to Liam Pleven for the Wall Street Journal, when investing in commodity ETFs, potential investors should keep in mind four key factors:
- Commodity funds that hold futures or physical materials are a better vehicle for tracking the commodities market than company stocks.
- Producer and miner stocks can increase even if the underlying commodity drops in prices because companies add value and cut costs.
- Commodity ETFs provide added diversification since they have a lower correlation with the overall equities market.
- For some commodities, like agricultural products wheat or corn, commodity ETFs are the best option to gain direct exposure to the changing prices since there are few large companies that directly produce the commodities.
For instance, retail investors can gain access to physical gold through ETFs, like the SPDR Gold Shares (GLD), which holds physical gold bars stored in vaults so that each share of GLD represents a fractional ownership of gold bullion. Physical gold ETFs will follow gold prices more closely than futures-based ETFs since ETFs may incur additional costs as they buy and sell futures to maintain their exposure. On the other, if you are adamant about metals and mining companies, there are also ETFs that cover the broad sector, such as SPDR S&P Metals & Mining (XME).
In the energy space, investors could consider futures-based or equities-based ETFs. For example, the United States Oil (USO) provides access to WTI crude oil price movements. Oil futures tend to respond to supply-and-demand fluctuations while companies may not be exposed to the immediate effects, depending on how or where they process or use oil.
Looking at agriculture, ETF investors can lean toward producers or futures. The Market Vectors Agribusiness ETF (MOO) tracks companies that supply farmers and benefit from higher crop prices. On the other hand, broad agriculture funds, like PowerShares DB Agriculture (DBA), offers exposure to prices changes in a basket of agricultural commodities.
Max Chen contributed to this article.
Full disclosure: Tom Lydon's clients own GLD.