Would you like to invest in commodities like grain, oil, or precious metals? From the immense potential profits to the diversification an investment in commodities could give your portfolio, buying commodities instead of stocks is often a great idea.
One of the easiest ways to invest in commodities is through a commodity exchange-traded fund (ETF). Commodity ETFs are bought and sold on an exchange just like a stock, making them incredibly easy to access and manage as an investor.
In this guide, we’ll look at the advantages, disadvantages, and unique characteristics of commodity ETFs. If you’re new to investing in exchange-traded funds, make sure you enroll in our course, The Basics of ETF Investing, before you begin.
How do commodity exchange-traded funds work?
Open the newspaper or a financial advice brochure and you’ll see endless stock or currency recommendations. While stocks can be great investments, some of your best returns could come from investing in commodities.
Commodity ETFs track the value of commodities like oil, grain, gold, and a massive range of other materials. Like other exchange-traded funds, commodity ETFs trade on an exchange, just like stocks, making them incredibly easy to buy and sell.
Some commodity ETFs track the value of a single commodity, often held through a futures contract or a store of the commodity itself. Other ETFs track more than one commodity or a group of similar commodities in the same general industry.
Commodity ETFs are a nice alternative to investing in ETFs through futures options and contracts, which are often risky, and commodity-related stocks, which aren’t an exact investment on the price of a particular commodity.
Since ETFs are traded on an exchange just like stocks, you can apply the same tricks to assessing an ETF’s value that you would a stock. Enroll in Stock Trading Ninja to learn the secrets to quickly judging the value of stocks and other investments.
What are the advantages of commodity ETFs?
Commodity ETFs have a wide variety of advantages for investors, from tax benefits to simplicity. Many of these are related to the way ETFs are bought and sold: on an exchange alongside everyday stocks.
Arguably the biggest benefit of a commodity ETF is its simplicity. Most commodity investors use futures contracts to assess the value of a commodity at a later date, and invest in it accordingly.
This involves numerous variables, and investors that are more concerned about a commodity’s overall value than its value at a particular moment in the future may benefit more from the more simple nature of a commodity ETF.
Another benefit of commodity ETFs is that investors do not need to hold what they are investing in to profit from it. For example, a gold ETF tracks the value of gold on the market and allows investors to profit from rises in the price of gold without the need to purchase or store physical gold.
Since certain commodities, like oil and food, are impossible for most investors to directly invest in, commodity ETFs also open up investment opportunities to most investors that otherwise wouldn’t be accessible.
Finally, since commodity ETFs trade on an exchange like stocks, the fees associated with trading them are very affordable. ETFs also offer tax benefits for investors that make frequent trades and realize large profits from their investments.
Do you have a portfolio? Are you familiar with the basics of investing? If not, enroll in our Investing Fundamentals course to learn about the basics of investing, from stocks and bonds to ETFs and mutual funds.
How can you earn money from commodity ETFs?
Since commodity ETFs track the price of a certain commodity, they’re an excellent choice for investors that believe a particular commodity is either overvalued at the current time or undervalued.
For example, if you think that current oil prices are unrealistically low, you could purchase oil-related ETFs (either pure oil ETFs or groups of oil-related ETFS) and sell them once the price of oil reached your predicted target.
Many investors in commodity ETFs day trade and profit from the day-to-day price fluctuations of various commodities. This is an intensive but rewarding way to earn money from the small variations in global commodity prices.
You can also earn money from commodity ETFs by betting that the price of a certain commodity will go down. When you short sell an ETF, you generate profit when its price decreases, rather than increases.
This is because when you choose to short sell a commodity ETF, you borrow it from a brokerage and return it at a later date. You can then sell it at the market price, and buy it back at a later date and a lower price to return to the brokerage for profit.
Not sure how short selling works? Don’t worry – it’s easy to understand once you’re familiar with the basics of trading stocks and ETFs. Join our Foundations of Stock Market Trading to learn about buying and selling stocks and ETFs on an exchange.
Why should you invest in commodity ETFs?
Investors purchase (or short sell) commodity ETFs for many reasons. Some might believe that a certain currency, such as steel or oil, is undervalued because of short-term economic conditions. In this case, investing in a commodity ETF could result in a long-term profit as the commodity gradually regains its true value.
Commodity ETFs also make it easy to speculate on the value of commodities without having to invest in more complicated and risky futures contracts. ETFs are traded on exchanges, making them easy for investors familiar with stocks to purchase or short sell without learning an entirely new investment skillset.
Finally, there are educational benefits to investing in commodity ETFs. Many people start their currency investing careers by trading exchange-traded funds and start to trade futures contracts and options as they gain more experience. The skills used to judge the value of a commodity ETF easily transfer to futures contracts and physical commodities trading.
One of the most important aspects of commodity investing is knowing how to use your capital efficiently. Read our blog post on Protecting Your Capital as a Beginner Trader to learn how to minimize your risk while investing in commodity ETFs.
Are you ready to start investing in commodity ETFs?
There are many reasons to invest in commodity ETFS, from diversifying your overall portfolio to capitalizing on a short-term decline or increase in the value of oil, wheat, gas, or any other commodity.
Enroll in our Basics of ETF Investing course today and start selecting commodities to begin your ETF investing career today!