The Best Ways to Invest in Commodities
Commodities provide investors with an opportunity to generate solid returns and diversify their portfolios, by purchasing futures contracts or ETFs that track specific commodities directly or by investing in company shares that provide indirect commodity exposure.
Trading physical commodities, like crude oil or corn, requires extensive work for individual investors to manage. NerdWallet recommends searching for accounts that offer lower fees that align with your investing goals and account type.
1. Futures Contracts
Physical commodities, such as gold bars, can be complex and too expensive for individual investors. Instead, individuals can invest in futures contracts – legal agreements with predetermined provisions detailing specifics like how many bushels of corn or barrels of oil one is purchasing – that provide similar returns.
Futures trading typically requires opening a brokerage account, and keeping an agreed-upon amount (known as margin) in your account at all times – making it riskier than investing directly in commodities, yet potentially reaping substantial returns should prices increase.
Individual companies that produce commodities can give you direct access to commodity markets through their shares. But share prices tend to lag behind price trends and may expose you to operational risks like industrial accidents or management decision mistakes; as a result, investing in commodity exchange-traded funds (ETFs) might be simpler for new investors.
2. Stocks
One simple way to invest in commodities is through purchasing stocks of companies that produce them. Their prices fluctuate with the prices of the commodity they represent – for instance, oil producers benefit when crude prices increase but it should be noted that one barrel of oil remains one barrel no matter who owns it at any given moment.
Investors have the option of directly purchasing physical commodities; however, this requires significant amounts of capital and includes risk associated with storage fees and more. Mutual and exchange-traded funds offer broad exposure to various commodities with relatively low minimum investments – for instance the S&P GSCI is an easy way to gain broad exposure across seven sectors by tracking 22 commodity futures contracts performance – giving investors easy exposure.
3. ETFs
ETFs track a range of commodities, such as gold, oil and agriculture products – offering you a cost-efficient investment option in this sector.
These funds tend to have less correlation with other assets, making them an excellent way to diversify your portfolio and protect it against inflation. They may even serve as a hedge.
If you believe oil prices will rise, consider investing in the United States Oil Fund (USO). These funds hold futures contracts and follow a “front-month roll” strategy of replacing any futures contracts that expire with new ones to ensure your portfolio stays closely aligned with market prices.
ETFs are easy to trade through your brokerage account, but make sure that before purchasing one you check its expense ratio; these fees make up a percentage of your total investment, and NerdWallet has a fee calculator so you can see just how much these costs will add up over time.
4. Mutual Funds
Add commodities to your investment portfolio can provide diversification, hedge against inflation and boost returns – just be mindful of any associated risks and consult your financial adviser before undertaking this investment strategy.
Investment in physical commodities such as gold bars, copper rods or cattle requires both money and storage space in abundance. When purchasing commodity futures contracts with margin trading risks attached, however, you must maintain a specific minimum level in your brokerage account to avoid potential losses.
Investing in commodities via mutual funds or exchange-traded funds is easier and less expensive. These funds typically follow a broad commodity index, providing access to various commodity exposures without futures contracts or stocks being too complex or costly for your budget. They’re an ideal option for new investors wanting exposure to commodity markets while simultaneously diversifying your investments as commodities have lower correlations than stocks and bonds do.
