How do I Choose the Best Commodity Index Funds?

A. Leverkuhn
A. Leverkuhn
Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Finding the best commodity index funds often means evaluating these funds carefully, looking at their specific role within the commodity exchanges and markets, and otherwise fine-tuning an investment strategy for buying into financial tools relying on physical products as underlying equities. Commodities are attractive, in part, because the items that support prices are actually physical, tangible items that people make use of in all economies. Looking closer at commodity index funds will help investors pick the ones that will work out best for them.

Experts often recommend picking the most broadly diversified commodity index funds. Index funds by their own nature are broader and more stable than some other types of funds. Traders can get access to even more solid gains with the best body index funds that track the most reliable indices in their sectors.

Be on the look out for high annual expenses. Some commodity index funds can be pricy, regardless of their market location. Investors can choose between domestic index funds or other international funds including emerging markets funds. Looking at the annual expense ratio and other costs will help beginners figure out which funds are affordable for them.

Another good tip with commodity index funds is to evaluate the setup of the fund, both in order to provide for easy price following and trading, and to hedge against some greater risks. Two new kind of index fund products are known as exchange traded funds (ETFs) and exchange traded notes (ETNs). Some professionals advise that ETFs are generally safer than some classes of ETNs, since the exchange traded notes may be subject to something called “counter-party risk” that occurs in trading.

There’s another key piece of advice for anything related to commodities. Professionals often think about “timing the market” when getting into commodities. The idea is that commodities are uniquely vulnerable to “price boom and bust,” where a common enthusiasm for commodities markets can push values much higher than they normally would be, and an eventual price correction will follow. Investors who choose “long” and “short” commodity index funds based on their market instincts can have a better chance of seeing long term gains.

Overall, investors can choose the best commodity index funds by looking at their total capital strategy and locating those funds in the “risk niche” that best fills any gaps in existing baskets of equities. For example, if the investor already holds high-risk and low-risk instruments, the commodity index fund can fill a specific mid-risk slot. Above all, experts stress the kind of diversification that encourages holding different sectors, different regional or national markets, different fund types, and different stock or bond products.

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