ETFs provide small investors a simple way to get into the commodities markets.

Commodity exchange-traded funds (ETFs) are funds that invest in raw materials.
These funds help investors gain quick access to the commodity markets.
Investors can buy and sell commodity ETFs the same way they do stocks.

Commodity investing is appealing for several reasons. It’s a great way to hedge against inflation, generate compelling returns, and diversify a portfolio.

But for individual investors, it’s usually not practical to buy physical raw materials like gold, copper, and oil or futures contracts tied to them. Those markets are largely the realm of professionals, given the high costs and complexity involved. 

That’s where commodity exchange-traded funds (ETFs) come in.

What are commodity ETFs

Commodity ETFs are securities (financial instruments that investors can trade) that provide exposure to the price changes of raw materials. These funds trade like stocks, so investors can buy and sell them on exchanges throughout the day. 

Further, investors can short sell shares of ETFs, meaning they can borrow shares from a lender and then sell them in hopes of purchasing them back later at a lower price. Investors can also buy ETFs on margin, which involves borrowing funds and then using them to purchase these securities. 

Types of commodity ETFs

There are four main types of commodity ETFs:

Physically backed ETFs: These funds hold the actual raw materials themselves, for example gold, silver or platinum. 

Futures-based funds: These use derivatives contracts, including futures, swaps and forwards, to grant exposure to different commodities. Regardless of whether the underlying raw-material price rises or falls, these ETFs can generate returns. These funds can potentially influence futures prices, instead of simply following them, because they make so many transactions.   

Equity-based commodity ETFs: These funds provide exposure to the stocks of companies involved with natural resources or other raw materials. For example, businesses that take part in extracting, producing, storing, or shipping these commodities. 

Exchange-traded notes (ETNs): These are debt-based securities issued by financial institutions. They track an underlying index, similar to many ETFs. ETNs don’t pay dividends, instead of providing lump-sum payments, which can help investors who own them to avoid short-term capital gains taxes. 

How do commodity ETFs fit in an investment portfolio? 

Commodities are alternative investments, meaning they are alternatives to more traditional assets like stocks and bonds. Investors can incorporate commodity ETFs into their portfolios in order to improve diversification. 

There …read more

Source:: Business Insider

      

Commodity ETFs give individual investors an easy way to diversify their holdings with raw materials

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