Exchange traded funds give investors targeted exposure to areas of the commodities market, however, there are several risks that come with niche investing.
“The widest-ranging commodities offerings lump together gold, natural gas, soybeans and other basic goods under the same ticker symbol. Then there are funds that focus on one major area of the sector, such as energy or agriculture,” Liam Plevin wrote for The WSJ.
ETFs also segment specialized areas of the commodity sector, giving an investor the option to invest in oil-services, platinum or livestock. The interest is there, as many of these funds have gathered over $1 million plus in assets. For example, the Teucrium Corn Fund (NYSEArca: CORN) invests in corn futures contracts, and has about $37.3 million in assets under management. [Agriculture ETFs: Farmland Prices Spike]
Investors must be aware that certain commodity ETFs invest in the actual physical material, such as the SPDR Gold Shares (NYSEArca: GLD) while others invest in futures contracts. Those that hold futures can see returns enlarged or reduced by pricing differences between new and expiring monthly contracts, which can cause confusion for investors. These ETFs do not reflect current pricing of the targeted commodity. [Gold ETFs Gain Inflows Despite Price Weakness]
Returns also can be driven by changes in supply and demand for the underlying commodities, reports Plevin. This can create more risk or volatility for niche ETFs because the focus is on smaller markets and asset pools. On the flip side, there can be a reward for taking on more risk. For example, the drought that wiped out the U.S. corn crop over the summer curbed supplies and boosted prices, and CORN ETF gained 5.6% in 2012. [ETF Spotlight: Agribusiness]
Investors need to be aware of what a commodity fund holds, and how the revenue is extracted from the commodity. This can help an investor decide if the fund will work within the chosen strategy and how market movements will impact their portfolios.
Tisha Guerrero contributed to this article.