Investing in commodities
There are several ways to consider investing in commodities. One is to purchase varying amounts of physical raw commodities, such as precious metal bullion. Investors can also invest through the use of futures contracts or exchange-traded products (ETPs) that directly track a specific commodity index. These are highly volatile and complex investments that are generally recommended for sophisticated investors only.
Another way to gain exposure to commodities is through mutual funds that invest in commodity-related businesses. For instance, an oil and gas fund would own stocks issued by companies involved in energy exploration, refining, storage, and distribution.
Commodity stocks vs. commodities
Do commodity stocks and commodities always deliver the same returns? Not necessarily. There are times when one investment outperforms the other so maintaining an allocation to each group might help contribute to a portfolio's overall long-term performance.
Diversification
Over time, commodities and commodity stocks tend to provide returns that differ from other stocks and bonds. A portfolio with assets that don't move in lockstep can help you better manage market volatility.
Potential Returns
Individual commodity prices can fluctuate due to factors such as supply and demand, exchange rates, inflation, and the overall health of the economy.
Inflation Hedge
Inflation—which can erode the value of stocks and bonds—can often mean higher prices for commodities. While commodities have shown strong performance in periods of high inflation, investors should note that commodities can be much more volatile than other types of investments.
Global Exposure
Commodity investing provides exposure to global economic trends and emerging markets, offering opportunities beyond traditional domestic investments.