Commodity funds invest in raw materials or primary agricultural products, known as commodities. These funds invest in precious metals, such as gold and silver, energy resources, such as oil and natural gas, and agricultural goods, such as wheat. Commodity funds may also invest in the companies that produce these commodities.
What are some benefits of commodity funds?
Because of their unique makeup, commodity funds deliver several benefits to investors, including:
- Portfolio diversification. Historically, commodity funds have had low correlation with stock market movements, which makes them a valuable source of diversification in a portfolio.
- Protection against inflation. Commodity prices tend to rise with inflation, making commodities one of the few assets that benefits from inflation.
- Potential financial growth. Commodity prices rise and fall in tandem with supply and demand. The more a commodity is in demand, the higher its price will rise, delivering higher profits to the investor.
What are some types of commodity funds?
There are many different types of commodity funds, including:
- Index funds. These funds track an index that includes various commodity assets.
- Commodity funds. Known as „true“ commodity funds, these funds invest directly in the underlying commodity asset. An example would be a commodity fund that holds a direct position in gold and oil.
- Futures-based commodity funds. These funds offer exposure to commodities through investing in futures contracts, without ever buying the actual commodity assets themselves. This type of investment can carry higher risk, due to the volatile nature of the futures contracts market.
What are the risks associated with investing in commodity funds?
Commodity funds have historically provided investors with an opportunity for diversification, downside protection and upside potential. However, as with all types of investment, commodity funds carry risk, and may not be right for every portfolio.
Commodity markets can be volatile, which can expose investors to the possibility of considerable price fluctuation. Commodities themselves and commodity companies are also exposed to political, economic, foreign currency and exploration risk.
What are some myths associated with commodity funds?
Myth nr.1:Commodity trading is too risky to be worthwhile.
Truth: Like all investments, commodity trading can carry risk. But commodities offer diversification and the potential for upside performance, among other benefits.
Myth nr.2: There is no way to know the degree of a commodity’s quality.
Truth: Exchange-traded commodities must meet a strict standard for quality. Exchanges subject commodities to careful inspection and audit procedures.
Myth nr.3: Commodity markets are very volatile.
Truth: Like stock markets, commodity markets can experience price swings. Commodities, however, benefit from price increases along with a rise in inflation, which mitigates some risk.
Why choose Nexa Level X for commodity fund investing?
Nexa Level X benefits from more than 20 years of insight and experience. We offer a wide range of commodity funds to help your portfolio meet your needs.
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