Exploring Ways of Investing in Commodities
Last time, we discussed characteristics of commodities as investments and their risk/reward profile. Now, let’s explore different ways to gain exposure to this asset class. Here are a few popular investment vehicles:
1.     Commodity-focused Mutual funds, exchange-traded funds (ETFs) are probably the simplest way for investors to gain exposure to various commodities without directly owning the physical assets. These investment vehicles can provide wide exposure with relatively low investment minimums. Funds can be specific to a particular commodity, such as gold or precious metals, or cover a broader array of commodities.
Some well-known commodity ETFs include Abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (ticker: BCD) for diversified commodities, SPDR Gold Shares (GLD) for the precious metal and United States Oil Fund LP (USO) for black gold.
2.    Commodity-Linked Stocks, investing in companies that are directly involved in the production, exploration, or distribution of commodities is another way to gain exposure to the commodity market. These companies’ stock prices are closely tied to the performance of the underlying commodity. For example, If the commodity rises in price, the companies producing that commodity may experience increased revenues and profits. But keep in mind that investing in producers such as miners or oil companies carries not only the commodity risk but also risks inherent to any company, such as poor management decisions, labor disputes, or project cost overruns.
3.    Futures originated as a way for farmers to set a price for future delivery of goods. This instrument offers investors the opportunity to speculate on price movements without owning the physical commodity. Broadly speaking, there 3 types of participants in futures markets:
a.      Hedgers – Buy and sell futures to hedge their existing exposure to a commodity. Ex. A corn producer selling corn futures because he expects crop yield to be better than expected.
b.     Speculators – Buy and sell futures based on assumptions and expectations without any real exposure to the underlying. Ex. A software engineer buying 6-month expiry silver futures on margin because his friend suggested.