How Do I Choose the Best Commodity Exchange-Traded Funds?

Geri Terzo
Geri Terzo
If performance in a certain commodity falters, there is little else to provide stability to the ETF.
If performance in a certain commodity falters, there is little else to provide stability to the ETF.

You might choose the best commodity exchange-traded funds (ETFs) based on the level of expertise that you have in a certain investment category. Also, your ability to handle risk may be considered when selecting the most appropriate funds. The cost to invest in ETFs is relatively moderate in comparison with other types of mutual funds, and as a result fees may not be a major factor when making a decision. Nonetheless, you should compare the investment performance and price of funds being considered with other ETFs that have a similar composition.

There are different strategies for selecting the best commodity exchange-traded funds. One such approach is to invest in those financial securities in which you have some familiarity. The more understanding that you have about a group of commodities, the better you may be able to recognize opportunities and also warning signals. Investing in some group of securities that are foreign may seem attractive and alluring but you may not be able to determine the impact changing economic conditions could have on performance.

Commodities come in various forms ranging from natural resources, including oil and natural gas, to raw materials, such as gold, silver, and copper, for instance. You may find that the best commodity exchange-traded funds are those that are dedicated to a certain category, such as energy, agriculture, or metals. Selecting a niche ETF can certainly limit the variables that are prone to impact the investment performance of a fund. It might also limit the amount of research that is necessary for an investor to truly understand the asset class in which he or she is investing.

Choosing commodity exchange-traded funds that are devoted to a single industry could also have its drawbacks. If performance in a certain commodity falters, there is little else to provide stability to the ETF. There are commodity exchange-traded funds that are diversified and provide exposure across various types of resources. Although these funds may be more complex then ETFs that focus on one type of commodity, they may be better able to protect against losses in an unstable economic environment.

Especially complex commodity exchange-traded funds change positions in contracts based on market conditions. For instance, if there is upward price momentum in energy commodities, the ETF would maintain long positions, which are bets that prices will rise. Once that trend weakens, and prices reverse course, the fund could replace the optimistic bets with short positions, which are investments that benefit when prices fall.

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    • If performance in a certain commodity falters, there is little else to provide stability to the ETF.
      If performance in a certain commodity falters, there is little else to provide stability to the ETF.