Commodity ETFs: Physical vs. Futures | ETF Trends

If you’re looking put commodity exchange traded funds (ETFs) into your portfolio, it’s wise to bone up on the two primary ways to get your exposure and how they fit into the larger picture.

Concern over speculators using ETFs to push up prices of commodities shouldn’t be blown out of proportion since it is only a small part of the industrial supply/demand equation, says Taras Berezowsky for MetalMiner. Investors have usually been interested in commodity ETFs as a hedging tool against potential losses. [Reports: Physical Aluminum ETF On the Way.]

Scott Thompson, co-head of European sales for ETF Securities, contends that it is a good time to invest in physically-backed ETFs because futures contracts have historically experienced greater volatility.

Still, know that owning ETFs that track futures is better during times of backwardation – a situation in which the futures price is lower than the spot price. Unfortunately, backwardation isn’t the normal state of being for commodities. Contango, the opposite situation, is more typical.

Thompson also remarks upon a more convergent physically-backed and futures-oriented market in the future as greater scrutiny is placed on risky assets. All in all, he believes that the markets will lean toward “more cyclical commodities as well as some foreign exchange and equity trends coming out over the next couple of months.”

For more information on commodities, visit our commodity ETFs category.

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.