Commodity ETFs: Are They Worth Buying?

| February 10, 2011 | 0 Comments

There’s never been a better time to buy commodities.  It used to be commodities were reserved for a tiny segment of the investor population.  But now, thanks to commodity ETFs, anyone can trade them.

And why not?  We’re in the middle of a commodity bull market.  Many commodities are trading at record highs.  And it’s showing no signs of slowing down.

So it should come as no surprise… commodity ETFs are taking the market by storm.

Chances are you own at least one in your own portfolio.  There are dozens to choose from and more are listed every month.  You can trade anything from tin to corn to heating oil.

But commodity ETFs aren’t perfect.  There are some negatives to owning them.  The question is, do the positives outweigh the negatives?

Let’s take a closer look…

There are a couple of significant advantages to investing in commodity ETFs.

First off, commodity ETFs provide exposure to commodities you otherwise wouldn’t be able to buy directly.  In some cases, the ETFs purchase commodity futures.  In other cases, the ETFs invest in the physical commodity itself.

Here’s the thing…

The average investor isn’t going to be trading futures.  They can be risky and expensive.  What’s more, most people aren’t interested in stocking up on a physical commodity.  It’s a process loaded with challenges from logistics to security.

All those concerns vanish by simply buying a commodity ETF.

Another major positive of commodity ETFs is diversification.

Commodities can make a great alternative to stock and bonds.  And each commodity class can provide its own level of diversification.  For example, energy commodities can move very differently than agricultural commodities.

But commodity ETFs aren’t without their drawbacks.

Certain commodities are hard to track because of contango.  Without getting into too much detail, contango is when a commodity’s futures price is higher than its projected spot price.  Basically, it means a futures price will decline towards the spot price as the futures’ expiration nears.

Here’s the problem…

Contango may cause a commodity ETF to drop even if the commodity’s price is climbing.  This can be a huge tracking problem for some commodities, with the popular oil ETFs being the prime example.

Another issue with commodity ETFs is the impact they have on commodity prices.  These ETFs give thousands of new investors the ability to pour money into commodities whenever they choose.

And the added speculation can lead to artificially high or low prices.

More importantly, it may cause the CFTC to step in and limit the amount of investment a single ETF can make.  This could make certain ETFs very difficult to buy if they’re in high demand.

Commodity ETFs can be volatile.  Commodities are volatile by nature.  If you invest in commodity ETFs, it’s possible you’ll see bigger swings in gains and losses.

So with all that being said… are commodity ETFs worth buying?

Despite the negatives, I think commodity ETFs are a great addition to your portfolio.

There are simply too many benefits to ignore.  Fact is, the more investment options you have the better.  And in my opinion, it’s very difficult to over-diversify.

Commodity ETFs open up some terrific new investment opportunities.  With a little research, you’ll see some of the vast potential for profits in this space.  Plus, now’s a great time to trade commodities… after all, we’re in the middle of a major commodity bull market.

We’re entering the golden age of commodity investing.  Now more than ever, you can diversify into just about any commodity you want.  Take a closer look at the explosive commodity ETF market.  These ETFs can be a great addition to your portfolio.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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