Friday May 23, 03:52 PM
Commodities -- Spoiled For Choice
By Padraig O'Hannelly
Having looked at rise of commodities last week, let's take a look at the range of commodity investments you can buy.
For the private investor, the most convenient method of investing in commodities is via commodity ETFs (Exchange Traded
Funds), also known as ETCs (Exchange Traded Commodities). The main provider is a company called ETF Securities, with a few also available from Lyxor, but you buy them just like normal shares through your stockbroker.
ETFs are covered in more detail here and here, but essentially they are companies created to own a basket of assets, and their share prices track the value of those assets very closely.
Choosing products
You can use ETFs to buy into all sorts of commodities. Products that are mined, such as metals and oil, are often termed 'hard' commodities, while wheat and other agricultural produce may be referred to as 'soft' commodities. ETF Securities categorises them as follows:
Energy: various crude oil products, gasoline, heating oil, and natural gas;
Industrial metals: aluminium, copper, lead, nickel, tin, and zinc;
Precious metals: gold, palladium, platinum, and silver;
Agriculture: includes coffee, cocoa, corn, cotton, soybeans, soybean oil, sugar, and wheat;
Livestock: lean hogs, and cattle. There is also a wide range of funds that combine baskets of these commodities, and they tend to be less volatile than many single-commodity funds. You can buy diversified funds that cover all commodities, such as ETFS All Commodities (LSE: AIGC), and if you dislike that fund's bias towards the energy sector there's also ETFS Ex-Energy (LSE: AIGX).
Other funds allow you to invest in specific sectors, such as agriculture.
Going short
In addition to buying direct exposure to the commodity price -- referred to as 'going long' -- it is also possible to take the opposite position and make a profit from a falling price, known as 'going short'. The ETFS Short Aluminium (LSE: SALU), for example, will change daily by the opposite of the daily percentage change in the DJ-AIG Aluminium Sub-Index (before fees, and any adjustments). If the index falls 1% on the day, you gain 1%.
Leveraging
You can also buy ETFs that magnify the daily changes in the underlying index. ETFS Leveraged Aluminium (LSE: LALU) will change by double the daily change in the DJ-AIG Aluminium Sub-Index. If the index falls 1% on the day, you lose 2%.
One important point to note about short ETFs and leveraged ETFs: The prices are re-based every day, so the return you get is based on daily changes to the index. Over time, this means that the return on a leveraged fund may not be equal to twice the return on the index over that period.
Similarly with shorts; if the market falls by 10% over a month, your gain is not necessarily 10%.
This may be in your favour or not, depending on how the market got to that point, but these are not the sort of investments you can just buy and forget.
While investors are spoiled for choice in this area, just because you can buy these products doesn't mean that you should; ETFs provide many new and interesting ways of making money, and of losing it.
If you want to buy ETFs, or any shares, remember that with Motley Fool Sharebuilder, you can buy shares for no commission until June 30.
More: Four Ways To Profit From A Soft Commodity Bull Market
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