How to Invest in Commodities with Commodity ETFs

What are Commodity ETFs?

Commodity Exchange-Traded Funds (ETFs) are a simple way to include resources in your investment goals. You benefit by gaining exposure to their prices and performance without owning the resource itself. These funds consist of stocks, futures, and derivatives that track the prices of the resource. In some cases, they also follow indices.

Types of Commodity ETFs

You can find commodity ETFs that fit your goals almost perfectly. There are funds that track many types of commodities like iShares GSG. Some track a single commodity like oil, gold, or energy. You can find sub-sectors like solar energy funds that track only one type of energy.

Should You Buy Commodity ETFs?

One advantage of these funds is that they simplify the trading process. Without a commodity ETF, you would have to make individual purchases of commodity contracts or invest in related derivatives or companies. You can invest in your chosen commodities without buying a contract or engaging in trading.

Advantages of Buying Commodity ETFs

You incur capital gains taxes only when selling a commodity ETF, giving it a tax advantage over other products like mutual funds. You will also experience simpler trading. You will have lower commissions and management fees.

How to Invest and Trade

Make sure to conduct extensive research before trading any commodity ETF. Track the price performance of some resources like coal. Observe how certain traded funds react to market conditions.

There are many criticisms of commodity ETFs that consist of futures since they struggle to track volatile commodities. However, you can start using these funds and commodity-traded securities in your investment arsenal when you have a good understanding of how commodities and commodity ETFs interact.

There are some strategies that can help you make your first investments in commodity ETFs. You can sell a gold ETF in one transaction. This helps to mitigate negative gold risks if you’re looking to stabilize some gold investments in your portfolio.

You can use an energy ETF to hedge against downturn risks for both the industry and foreign investments. Sell an energy ETF to hedge against downturn risks if you own a lot of energy stocks.

Foreign investments in a country where coal is a major source of income will provide an opportunity to sell a coal ETF as a protection against downturns.

Inverse commodity ETFs mimic the price of the index in the opposite direction. Inverse ETFs are good if you want to sell a commodity but cannot sell commodity ETFs due to margin or account rules.

Trading options on commodity ETFs can be a good plan if you do not want to close your positions in commodity ETFs but wish to gain short exposure or protection.

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Source: https://www.thebalancemoney.com/how-to-invest-in-commodities-with-commodity-etfs-1214756