What is a Commodity ETF?

A commodity exchange traded fund or ETF is a specific financial product that allows investors to buy into “structured equities” for a specific commodity. The commodity ETF is unique because commodities are physical items, including foods, precious metals, and other raw materials, that have concrete market values. The commodity ETF has changed the way many investors look at making sophisticated financial plays on the values of all of these physical goods that people use every day, and that travel in bulk shipments from one country to another.

The exchange traded fund is a specific, innovative, and relatively new financial model for an investment product. Often, the funds known as commodity funds “bundle” different stocks and securities into one managed fund product that aims for a specific price trajectory relative to the changing value of the underlying commodity. The issuers of these investment opportunities will clarify the goals and price relationships of the funds in a prospectus or fund report that investors should read carefully.

Although commodity ETFs may be sold over major national exchanges, commodities themselves are often sold in specific commodities exchanges. Some experts have criticized these commodities markets for being vulnerable to excessive speculation, where a huge influx of investors with little stake in the actual physical commodities results in a lot of price volatility. This is something for investors to keep in mind when they are considering getting involved in a commodity ETF or similar fund, especially since the careful use of the ETF can help in hedging against certain commodities risks.

Some of the major advantages of commodity ETF products have to do with the way that busy investors can “cash in on” any physical commodity from gold and silver, to coffee, wheat, and other food crops. Rather than buying the commodities themselves, or even “commodities futures” that produce a specific value shifting agreement, the commodity ETF can be a long or short play on a particular raw material. In the past, commodities futures were a primary way of investing in commodities through the financial markets. The commodity ETF is providing more diverse options to the modern trader.

Where many of the commodities futures include specific expiration dates, responsibility to exercise options, and other time sensitive features, the commodity ETF is much more like a stock; investors can buy and hold these funds for as long as they need to, in order to fit the commodity side of their portfolio into their ongoing investment strategies. That’s leading today’s diversified investors to consider an easy contribution to a commodity ETF that may be readily available from their brokerage through an online trading platform. It’s worth looking at how commodity ETFs can help do away with some of the restrictions and limitations of classic commodity futures contracts through their managed diversification in the actual companies and holders of commodities around the world.