Commodity Exchange Traded Funds

By Ahmad Hassam

If you are interested in investing in commodities than you can invest in a commodity mutual fund! Many people are not aware that commodities as an asset class has a lot of potential especially in the 21st century. It is being predicted that the 21st century belongs to the commodities.

There are many mutual funds that invest in commodities. Just visit the Morningstar site and you can get the list of such mutual funds that invest in commodities. Just buy the shares of the commodity mutual fund and let its NAV appreciate before you can sell for a capital gain. This is the simplest way for you to get involved in investing in commodities as the mutual fund portfolio management will be done by a professional manager and you have to do nothing. But are mutual funds the best investment vehicles for your wealth building objectives.

Now, you must have heard about the Exchange Traded Funds (ETFs). ETFs are really hot investments these days. ETFs started off some three decades back but became highly popular as investment vehicles in such a short time.

Now the good thing about investing in ETFs is that they give you the diversification benefits of a mutual fund with very low fees something like 0.7% as compared to 2-4% of the mutual fund. Driven by the growing demand of commodities by the investors many financial institutions are now offering Commodity ETFs.

ETFs have the added benefit of being able to trade like stocks giving you the powerful combination of diversification and liquidity. So unlike a mutual fund whose net asset value is calculated at the end of the day and the shares of mutual fund cannot be traded during the day, you can go both long or short on ETFs all the time. Something you cannot do with a mutual fund!

ETFs are mostly constructed to mimic some market sector index. Sector ETFs are a hot investment right now. Now, you can find thousands of ETFs in the market on different market sectors, stock indexes, currencies, commodities and so on. This diversification plus liquidity benefit makes an ETF a better investment tool as compared to the mutual fund and the stocks.

Let's take an example of a commodity ETF. The Deutsche Bank Commodity Index Tracking Fund is listed on AMEX and tracks the Deutsche Bank Liquid Commodity Index. This index is based on a basket of six commodities: light sweet crude oil, heating oil, gold, aluminum, corn and wheat. The first Commodity ETF in US was launched by Deutsche Bank in the start of 2006. This ETF is based on the Deutsche Bank Commodity Index and as you can judge

As always what you need is an ETF that tracks an individual commodity. Now, every month a new ETF gets launched. There are a number of Commodity ETFs that track individual commodities like crude oil, gold and silver. Do your research on Commodity ETFs, you may find a good investment. Now the ETF of our example invests directly in the commodity futures contract. If you have trade futures than you must know that futures are highly volatile. Now one of the downsides of investing in this Commodity ETFs is that it can be fairly volatile as it is based on commodity futures contracts that get rolled monthly. Another downside to this Commodity ETF is that it is based on a basket of six commodities only. - 23212

About the Author:

Mr. Ahmad Hassam has done Masters from Harvard University. Trade Dow Futures . Learn Commodity Trading !