Commodity Investments
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Commodity investments more than most, get a lot of attention in the press with the price of oil, gold, corn, soy and hogs in the national news nearly every day (although you may have only seen oil and gold as the two most common). While investing in the commodities markets can be a difficult asset to research, analyse and predict, commodity mutual funds provide an opportunity for even the most clueless private investor to be able to profit from the fluctuations in the value of commodities. The recent media attention has been focused on, and fueled by, the rapid ascent in the price of gold which has been continually rising and breaking records over the past 18 months.
One of the key benefits of commodities is that they provide investors and asset managers with the opportunity to have a more diversified portfolio. Investing in futures contracts or actual commodities provides a portfolio component that is not a traditional stock, bond, or a mutual fund that invests in stocks and/or bonds. In the past, commodities have tended to have a low correlation to the majority of financial and equity markets, meaning that they do not necessarily increase of decrease in relation to the movements of the rest of the financial markets. For the majority of private and institutional investors, obtaining this low relation to the other markets is one of the main objectives when looking for a bit more diversification in their portfolio.
As well as the variety of different formats of commodity funds providing a different level of involvement, risk and investment, commodity mutual funds can also offer a variety of investment strategies, including active management or passive management. Active portfolios buy and sell on a regular basis in an attempt to try and provide a better return on investment than the benchmark index, but this can also go the other way is it is a higher risk investment and can result in a worse return than the market as a whole provided. In contrast, passive portfolios aim to copy a benchmark index and match it’s same level of growth - usually a smaller amount but a safer option than actively managed funds.
Whilst it does provide the safety associated with diversification, the commodities markets can be volatile and subject to spikes and short-term price swings as well as long lulls. Over the course of just a few days, prices can go from record highs to record lows - a trait that is almost unheard of when it comes to equity markets. One example of this is gold and copper both of which can have huge movements during the day which if analysed and predicted correctly, can provide similarly huge returns on investments.
Another consideration is the structure of various mutual funds and the benchmark indexes that they are following. In a significant majority of the commodities indexes, energy is often the heavyweight, regularly accounting for over half of the index meaning that when a mutual fund is attempting to directly follow the index, at least half of the fund's assets will be in energy. Some funds place limits on the percent of the portfolio invested in a single commodity to avoid an over-concentration in a single investment because this over-concentration will negate the diversification that most investors are looking for.
One of the key benefits of commodities is that they provide investors and asset managers with the opportunity to have a more diversified portfolio. Investing in futures contracts or actual commodities provides a portfolio component that is not a traditional stock, bond, or a mutual fund that invests in stocks and/or bonds. In the past, commodities have tended to have a low correlation to the majority of financial and equity markets, meaning that they do not necessarily increase of decrease in relation to the movements of the rest of the financial markets. For the majority of private and institutional investors, obtaining this low relation to the other markets is one of the main objectives when looking for a bit more diversification in their portfolio.
As well as the variety of different formats of commodity funds providing a different level of involvement, risk and investment, commodity mutual funds can also offer a variety of investment strategies, including active management or passive management. Active portfolios buy and sell on a regular basis in an attempt to try and provide a better return on investment than the benchmark index, but this can also go the other way is it is a higher risk investment and can result in a worse return than the market as a whole provided. In contrast, passive portfolios aim to copy a benchmark index and match it’s same level of growth - usually a smaller amount but a safer option than actively managed funds.
Whilst it does provide the safety associated with diversification, the commodities markets can be volatile and subject to spikes and short-term price swings as well as long lulls. Over the course of just a few days, prices can go from record highs to record lows - a trait that is almost unheard of when it comes to equity markets. One example of this is gold and copper both of which can have huge movements during the day which if analysed and predicted correctly, can provide similarly huge returns on investments.
Another consideration is the structure of various mutual funds and the benchmark indexes that they are following. In a significant majority of the commodities indexes, energy is often the heavyweight, regularly accounting for over half of the index meaning that when a mutual fund is attempting to directly follow the index, at least half of the fund's assets will be in energy. Some funds place limits on the percent of the portfolio invested in a single commodity to avoid an over-concentration in a single investment because this over-concentration will negate the diversification that most investors are looking for.
