Invest in Commodities through Funds and Indexes - dummies

Invest in Commodities through Funds and Indexes

By Amine Bouchentouf

A common misconception among investors is that you can only trade commodities by opening a futures account. While the futures markets certainly provide an avenue into the commodities markets, you have other tools at your disposal, including investing through funds and indexes.

Exchange Traded Funds

Since they first emerged on the scene a few years ago, the popularity of Exchange Traded Funds (ETFs) has soared. And for good reason. They’re privately run funds that trade on a public exchange, just like stocks. This ease-of-use has directly contributed to their popularity among investors.

A number of ETFs have been introduced in recent years, which track the performance of commodity-related assets, such as gold, silver, and crude oil. But it’s not just individual commodities that are now tracked by ETFs. Commodity indexes, such as the Deutsche Bank Liquid Commodity Index (AMEX: DBC), also has an ETF that tracks its performance.

Commodity Mutual Funds

Investors who are used to investing in mutual funds will enjoy knowing that a number of mutual funds invest directly in commodities. Two of the biggest such mutual funds are the PIMCO commodity fund and the Oppenheimer fund. Some funds seek to mirror the performance of various commodity benchmarks, while others invest in companies that process commodities.

Commodity Indexes

A commodity index acts a lot like a stock index: It 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, and they follow different construction methodologies. As such, the performance of the indexes — there are currently five — is different across the board. Most of these indexes can be tracked either through the futures markets or through ETFs.

Emerging Market Funds

Due to geographical happenstance, commodities are scattered across the globe. No single country dominates all commodities across the board. However, a few countries do dominate specific commodities. South Africa, for instance, has the largest reserves of gold in the world, Saudi Arabia has the largest oil reserves, and Russia has the biggest palladium reserves.

As the demand for commodities increases, the economies of these emerging markets have been soaring. One way to play the commodities boom is by opening up your portfolio to emerging market funds.