Commodities ETFs: A Better Bet Than Commodities Futures
Most investors know about commodities as an asset class, but few find themselves actually including these investments in their portfolios. On some level that’s understandable because commodities are often presented as one of the more intimidating investment vehicles around. Known for their volatility and wild price swings, commodities of all stripes are impacted by a host of factors that don’t affect traditional investment fare like stocks and bonds. Supply and demand dynamics, political forces and weather forecasts can all way on commodities.
Not to mention the fact that many investors don’t understand the futures market and it’s no surprise legions of investors eschewing commodities. That’s a mistake because commodities are the best way to hedge a portfolio against the ills of inflation and a declining U.S. dollar. Those are just two of the reasons why the financial media voraciously covers crude oil and gold and to be sure, those are a couple of commodities that should have a place in many portfolios.
And while futures investing is inherently risky, there are dozens of commodities-based ETFs and ETNs on the market that investors should consider. The evolution of the ETF industry has been a boon for investors that want to access commodities on a more conservative level. Let’s put the opportunities that come with commodities ETFs into context for a minute. Most investors would never consider buying coffee, cotton, orange juice or sugar futures. Yet every one of those commodities can be just as rewarding as oil and gold. Fortunately, there are ETFs for those products as well that investors can own without the risk or the cost of owning the underlying commodities themselves.
Investors should note that the world of commodities ETFs is not without risk. Many commodities ETF and ETNs do use futures contracts to accomplish their investment objectives and this strategy has come under intense scrutiny from federal regulators. Given that fact, we prefer ETFs that actually own the underlying commodity they’re designed to track. Precious metals ETFs are a good example of this, such as the SPRD Gold Shares (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV).
Another strategy conservative investors are sure to appreciate are those ETFs that focus on commodities by using a basket of stocks. This is a practical strategy that most investors understand and equity-based commodities ETFs don’t skimp on the returns when certain commodities are in bull markets. In this space, we’d consider the Market Vectors Agribusiness ETF (NYSE: MOO) or the Oil Services HOLDRs (AMEX: OIH).
