Commodity exchange traded funds (ETFs) have seen unwavering popularity in recent years. If you’re one of the growing number of investors looking to get in on the action, it’s worth reviewing the ins and outs of commodity ETF investing so you don’t get burned.
Advisors are increasingly recommending that investors include some commodities exposure as a way to diversify your portfolio, even with their high volatility, comments Ben Baden for U.S. News & World Report. [Why there’s upward pressure on commodities.]
Five years ago, they were more of a novelty. Now, with potential inflation and greater demand for commodities around the world, there’s definitely a reason to have between 5% and 10% of your overall allocation in commodities. Nevertheless, it is important to know what you’re getting yourself into. [Commodity ETFs: follow the trend.]
- Risks. Investing solely in commodities exposes you to extreme volatility. However, if you add a small portion to a portfolio, you may benefit from diversification through the low correlation commodities have with more traditional investments, such as stocks and bonds.
- Diversity. Don’t rely on a single commodity investment or get caught up in the new “it” commodity. For example, gold has been getting a lot of attention lately but it is possible that the asset won’t appreciate much more. Most advisors would urge that you get broad exposure to a number of commodities instead.
- Choosing. You can gain exposure to commodities through commodities ETFs or equity-based ETFs with companies that produce the commodity. But be sure to know what the differences are. [The four types of commodity ETFs.]
- Trend Following. With volatile asset classes, you can protect yourself with a strategy. We use trend following by watching the 200-day moving average as a buy and sell signal. [How to follow trends.]
For more information on commodities, visit our commodity category.
- PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC)
- iShares GSCI Commodity Indexed Trust (NYSEArca: GSG)
- PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBA)
- Market Vectors RVE Hard Assets Producers (NYSEArca: HAP)
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.