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Should a Commodities ETF Be Part of Your Portfolio?
Posted By Ron On May 7, 2011 @ 1:25 AM In Exchange Traded Funds,Investing | Comments Disabled
Short answer? Probably not, unless you’re an extremely aggressive investor who has a strong understanding of how commodities and commodities ETFs work.
Commodities are things you can hold and that have an active investing market. Stocks, while you can hold them in a certificate form, are just pieces of paper that represent ownership in a business. Bonds are just pieces of paper representing the debt an entity holds. Commodities are things like gold, silver, oil, lumber, wheat, coffee, cattle, and metals. They are physical, tangible things.
Most commodities have a very low correlation with the main stock market indexes. For example, the price of gold generally (though not always) rises when stock fall. Similarly, the rise in the price of oil very often accompanies or foreshadows a slow decline in stock prices. Due to the low correlation between commodities and stocks, investors usually buy commodities ETFs as a way to hedge  the overall stock market. Hedging refers to the practice of buying two investments whose returns tend to have a low correlation, in an effort to reduce risk.
These ETFs track the performance of only one commodity, such as oil, gold, or silver.
These track the performance of a diverse group of commodities. It may include a set of agricultural products (wheat, cattle, pork bellies), metals (gold, silver, nickel, and tin), or energy products (oil, natural gas, uranium). Others may combine things like cattle, corn, and gold or even uranium, coffee, and lumber. The thinking is that a commodity index ETF can garner gains from a more diverse set of products.
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