Commodity exchange traded funds (ETFs) are turning some investors’ heads. But there are ways to gain exposure to commodities without investing in the physical asset.
There are various ways to invest in the commodities market, each with its pros and cons, and one way to invest in hard asset ETFs is through the equities market, according to Hard Assets Investor.
“As hard assets, they are the building blocks of world economies, and they can be a building block of a portfolio,” Ed Lopez, marketing director at Van Eck Global, says. Lopez notes that as global economies recover and grow, it’s going to push demand for these commodities higher, putting pressure on prices.
Adam Phillips, director of sales at Van Eck, says that both equity commodity ETFs and physically backed or futures-based ETFs can co-exist in a portfolio and be complementary.
One argument in favor of investing in hard asset equity ETFs is that you may know a little about a particular commodity, but the person running a company involved in mining or producing that commodity is duty-bound to know a whole lot more.
Still, it is important to know that while the underlying hard asset and the company that mines it are correlated to an extent, there some differences:
- Like any other company, these firms can have things go wrong, including mismanagement, corruption, environmental disasters, labor strikes, lawsuits and more
- Companies also hedge their exposure to commodity price oscillations by using futures contracts to lock in in prices, which means that the company may not benefit if commodity prices rise
However, commodity producers can just as likely make brilliant business decisions, and they can also benefit when new mines are discovered and they can cut costs and boost profits.
Tax-wise, long-term capital gains on equities are set at 15%. (Read more on how ETFs are taxed).
Foster and Phillips say that investors should approach hard asset ETFs as equities, since they have a higher correlation with equities than commodities. “In normal markets, they’ll have a positive correlation with the broader equity markets,” Phillips says.