Futures-based exchange traded funds (ETFs) offer another way to diversify financial portfolios, which is wonderful assuming you understand how they function.
Futures-based ETFs are found in commodities, stocks, Treasury bonds and global currencies. For example, PowerShares DB Gold (DGL) invests in gold futures, not the bullion. These ETFs provide investors with a way to profit from the fund’s short-term price movements without actually owning the underlying asset. The futures contract lets you buy a certain commodity, such as gold, at a later date, and in return, you agree to keep that promise, explains Myra P. Saefong for MarketWatch. This comes with a price advantage because you’re not buying the physical commodity and the investment is leveraged, which means it has greater risks involved. Whenever increased risk is involved in investing, ensure you fully understand what you’re purchasing.
Not only is it important to understand how leverage works with futures ETFs, but margin is another concept you’ll encounter. Margin is the fluctuating amount of money you must keep in the account to cover losses. A margin call is when you have to cough up more money to your broker if a trade goes sour.
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