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Important Investment Vehicles for Commodities

The commodities markets are wide and deep, giving you a number of investment vehicles to choose from. Here are a few important commodities options to consider:

  • Futures commission merchant (FCM): Opening an account with an FCM is the most direct way for you to invest in commodities through the futures markets, enabling you to trade futures contracts, options, and other derivative products directly through the main commodity exchanges. Note: Open an account through an FCM only if you have a solid grasp of trading futures and options.

  • Commodity trading advisor (CTA): The CTA is a registered investment professional who has a good grasp of the concepts in the futures markets.

  • Commodity pool operator (CPO): Like CTAs, CPOs have the authority to invest on behalf of clients in the futures markets, but they are also allowed to “pool” client accounts under one giant account and enter the markets en masse, which increases the purchasing power of the fund and provides additional leverage.

  • Integrated commodity companies: The equity markets enable you to get exposure to commodities by investing in companies — ExxonMobil (crude oil) and Rio Tinto (metals), for example — that process natural resources.

  • Specialized commodity companies: Companies that focus on either one commodity or on one aspect of the supply chain. Starbucks (NASDAQ: SBUX), for example, focuses strictly on selling and marketing coffee-related products.

  • Master limited partnerships (MLPs): Private partnerships that trade on public exchanges, just like stocks. This unique combination provides several advantages, including tax advantages and the direct distribution of practically all cash flows to shareholders.

  • Exchange traded funds (ETFs): Privately run funds that trade on a public exchange, just like stocks, but track the performance of commodity-related assets, such as gold, silver, and crude oil, as well as commodity indexes.

  • Commodity mutual funds: Mutual funds that invest directly in commodities. Two of the biggest are the PIMCO commodity fund and the Oppenheimer fund.

  • Commodity indexes: An index that tracks a group of securities for benchmarking and investing purposes. Commodity indexes are constructed and offered by different financial institutions, such as Goldman Sachs and Standard & Poor’s.

  • Emerging market funds: Funds that feature commodities in emerging markets, such as South Africa (gold), Saudi Arabia (oil), and Russia (palladium), as well as others.

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