Commodities Investment Vehicles: Managed Funds and Physical Commodities - dummies

Commodities Investment Vehicles: Managed Funds and Physical Commodities

By Amine Bouchentouf

The two most critical questions to ask yourself before getting started in commodities are the following: What commodity should I invest in? How do I invest in it? Means of investing in commodities include managed funds and the physical commodities.

Commodities managed funds

Sometimes it’s just easier to have someone else manage your investments for you. Luckily, you can count on professional money managers who specialize in commodity trading to handle your investments.

Consider a few of these options:

  • Exchange-traded funds (ETFs): ETFs are an increasingly popular investment because they’re managed funds that offer the convenience of trading like stocks. In recent years, a plethora of ETFs has appeared to track everything from crude oil and gold to diversified commodity indexes.

  • Mutual funds: If you’ve previously invested in mutual funds and are comfortable with them, look into adding a mutual fund that gives you exposure to the commodities markets. A number of funds are available that invest solely in commodities.

If you have a pet or a child, sometimes you hire a pet sitter or babysitter to look out after your loved ones. Before you hire this individual, you interview candidates, check their references, and examine their previous experience. When you’re satisfied with the top candidate’s competency, only then do you entrust that person with the responsibility of looking after your cat, daughter, or both.

The same thing applies when you’re shopping for a money manager, or money sitter. If you already have a money manager you trust and are happy with, stick with him. If you’re looking for a new investment professional to look after your investments, you need to investigate him as thoroughly as possible.

Physical commodity purchases

The most direct way of investing in certain commodities is to actually buy them outright. Precious metals such as gold, silver, and platinum are a great example of this. As the price of gold and silver has skyrocketed recently, you may have seen ads on TV or in newspapers from companies offering to buy your gold or silver jewelry.

As gold and silver prices increase in the futures markets, they also cause prices in the spot markets to rise (and vice versa). You can cash in on this trend by buying coins, bullion, or even jewelry.

This investment strategy is suitable for only a limited number of commodities, mostly precious metals like gold, silver, and platinum. Unless you own a farm, keeping live cattle or feeder cattle to profit from price increases doesn’t make much sense.