It wasn’t too long ago that the average retail investor wouldn’t have thought of investing in commodities. These days, commodity investing is easier than ever, thanks to the advent of commodity exchange traded funds (ETFs).
Before ETFs, traders would buy and sell futures contracts on the underlying commodities or buy and sell stocks of companies that produced commodities, comments Todd Shriber for Investing Answers. These seven popular funds are useful, but before buying, you should understand exactly what you’re getting into.
SPDR Gold Shares (NYSEArca: GLD). GLD is the second-largest ETF in the world, with $50 billion in assets, and the world’s sixth-largest owner of physical gold. Each share of GLD is backed by physical gold bullion, which makes it an alternative to actually investing in physical bullions. [The Case for Investing in Gold ETFs.]
iShares Silver Trust (NYSEArca: SLV). SLV is backed by phyiscal holdings of silver, with $5.5 billion in assets, and the fund has an expense ratio of 0.5%. Historically, when gold prices increase, so do silver prices. However, silver has industrial applications, which makes it less volatile than gold. [5 Reasons for Silver ETFs’ Special Glow.]
United States Oil (NYSEArca: USO) and United States Natural Gas Fund (NYSEArca: UNG). These two funds invest in futures contracts for oil or natural gas. As futures contracts expire, the funds roll-over holdings by purchasing new contracts every month. The build of the funds makes it vulnerable to contango – future prices of the commodity are higher than today’s price, which forces the funds to sell low and buy high when rolling over. Energy observers are still waiting on the opposite to occur, or better known as backwardation. Contango can be mitigated by looking for funds that invest in all 12 months of future contracts, not just the front month. [Commodity ETFs: Understanding Contango.]