This Equity Commodity ETFs Guide will help investors understand this market and why they should have a percentage on their portfolio invested in them.
Commodities are the building blocks of the items that are manufactured and used by consumers and industry. A good example is the garment industry. The commodities for them are cotton and the oil that makes the nylon and rayon for the fabrics. For the food industry that manufactures the vast quantities of processed food most American eat there is corn, wheat, rice, cattle and pork. For most manufactures of consumer products there are the different alloys like steel, along with gold, silver and palladium. All of these basic materials are commodities and are traded on the market.
The values and prices of these commodities vary with the different factors the affect their products and quantities that limit their supply. For the commodities that are grown, the weather is the biggest factor, but demand also plays a key component. An example of this is the situation with corn in the past few years. Farmers have always needed to feed their livestock and consumers eat it. The brewers have also taken their share to produce the vast quantities of beer and whiskey the American consume daily. The new consumer of corn is the ethanol manufactures. This is from the energy sector that produces this alcohol for the gasoline industry. If a series of storms early in the season delay the planning of this crop, or the lack of rain hampers its growth the availability of this commodity becomes limited. Just like anything elsewhere when demand is high and supply is low, the prices rise.
To take advantage of this, investors purchase futures on certain commodities. This is a gamble because the future price is not known. But all types of investments are gambles.
The other types of commodities have other factors that affect them other than the weather. With minerals and the mining of them, there are labor disputes that can limit the supply and political unrest in the countries where the mines are located that can severely hamper production.
To invest in commodities means to have the ability to handle the delivery and storage of said commodity until it is purchased. This is generally done on a large scale and is cost prohibited by most investors. This is where ETF investing comes into play. These investment tools allow for investors to get a stake in this sector of the market.
There are two different types of ETF’s a person can place in their portfolio. There are ETF’s that have their holdings in just one type of commodity and then there are those that have many different ones. The ETF’s that have more than one are generally in the same sector is referred to a basket ETF.
An example of a basket ETF is Vanguard Materials ETF (VAW). There are a total of 123 different stocks in this funds holdings. The largest sectors of the holdings are Diversified Chemicals at 19.90%, Fertilizer and Agriculture chemicals at 12.90%, Specialty Chemicals at 11.10%, Steel at 10.00% and Industrial gases at 9.10%. This allows exposure to a wide variety of markets for a diverse portfolio strategy. This ETF had a one year performance last year of 63.80%.
For a single commodity the United States Oil (USO) is a good example. This ETF has 49.29% of its holdings in oil futures with the remained in cash to make an investment when the right opportunity arises. This ETF only had a market return of 18.67% last year but in 2007 it had a return of 46.82%.
When looking to invest in ETF’s there are several different approaches that ETF’s use for their investment approaches. There are physically backed ETF’s, future based EFT’s and Commodities Intensive Equities. Each one of these ETF’s has its own advantages and risks for investors to decide on.
The physically backed ETF’s actually take possession of the commodity, but this is not possible with every kind of commodity because of certain factors. The commodities that this is cost prohibited are the perishable ones, or they are difficult to store or have a low weight to value ratio like livestock. A large number of the ETF’s in this category are precious metals.
The future based ETF’s are for those items that have the high cost of transporting and storage like nearly all of the agricultural commodities and the energy sector like oil and natural gas. These futures are purchased with an agreement to sell the contracts at a specific time for a specific amount.
The Commodities Intensive Equities are ETF that are holding stocks that are holding the commodities. Examples are Market Vectors Gold Miners ETF (GDX) and iShares S&P Global Timber & Forestry Index (WOOD).
When it comes to your investment money, diversification is generally the best way, but not always. An example of this is with gold in the past few years. If you were to get in when the price was at $400 an ounce 5 years ago then you would have tripled your money already.
Commodities are real items that are bought, sold and used that have limits to what is available at any particular time. This Equity Commodity ETFs Guide has attempted to point out the different components involved with this market and examples to help guide you in your path to investing.
For additional resources about ETF on this website, please view Mexico ETFs and South Korea ETFs
If you would like other ETF investing news from Vanguards then please try Vanguard FTSE All-World ex-US ETF on our sister site www.bestmutualfundsnow.com and Best Asia ETFs on stockmarketinvestingblog.com.
We strive to bring you the latest and most accurate data possible from the home sites of the investment institutions we name. Always remember the bigger the risk, the larger the reward or loss. Invest with caution.
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