Commodities are a distinct asset class with returns that are largely independent of stock and bond returns. Commodities are raw materials used to create the products consumers buy, from food to furniture, to gasoline or petrol. The market distinguishes between two categories of commodities: hard commodities, which includes energy and metals, and soft commodities, which are agricultural assets like corn and wheat. Commodity prices often follow inflation, which makes them appealing to investors looking to diversify their portfolios. They can and have offered superior returns, but they still are one of the more volatile asset classes available.
DIFFERENT CLASSES
Metals.
Gold, Silver, Platinum, Aluminum, Copper, Palladium.
Energy.
Crude Oi, Natural Gas, Heating Oil, Gasoline, Coal.
Agriculture.
Wheat, Corn, Soy, Rubber, Timber.
Livestock.
Live Cattle, Lean Hogs, Feeder Cattle, Pork Cutouts.
BENEFITS OF COMMODITIES
Portfolio Diversification.
Historically, commodity funds have had low correlation with stock market movements, which makes them a valuable source of diversification in a portfolio.
Protection Against Inflation.
Commodity prices tend to rise with inflation, making commodities one of the few assets that benefits from inflation.
Potential Financial Growth.
Commodity prices rise and fall in tandem with supply and demand. The more a commodity is in demand, the higher its price will rise, delivering higher profits to the investor.
HOW TO INVEST IN COMMODITIES
Physical Ownership.
This is the most basic way to invest in commodities. Owning these types of commodities is usually best left to those who will be turning that commodity into a finished product.
Future Contracts.
Futures originated as a way for farmers to set a price for future delivery of goods. Buying and selling futures contracts requires skill and experience.
Individual Securities.
Shares of commodity-producing companies grant you indirect access to the commodity markets. If the commodity rises in price, the companies producing that commodity may experience increased revenues and profits.
Mutual Funds, ETFs, and ETNs.
These securities can provide you wide exposure with relatively low investment minimums. Funds can be specific to a particular commodity, such as gold or precious metals, or cover a broader array of commodities.
Alternative Investments.
Hedge funds or private investments specializing in commodities are an option. These are highly speculative and leveraged investment strategies, carrying a high degree of risk and volatility.