How To Invest in Commodities

Investing in commodities like oil or gold has been popular for the last several years, because these assets have been rising in price.  Also, commodities are traditionally seen as a hedge against inflation (which many believe is coming), as well as serving a purpose in industrial uses.

However, investing in commodities has usually been tricky because it has usually been done contractually, or through the use of futures contracts.  The futures market is tough, as it involves margin and leverage, and has many seasoned players.

However, there are other ways to invest in commodities that may suit the regular investor.

Commodity ETFs

Over the past few years, many commodity ETFs have been created to help investors enter this market.  These ETFs are designed to track the underlying asset price, and do so through contracts behind the scenes.

As a result, they don’t perfectly follow the underlying price, but they come very close.  They also offer investors the relative safety of not having to directly invest in contracts themselves, but rather the ETF product.

If you want even more leverage, there are also leveraged ETFs that track the underlying commodity in multiples, such as 2x or 3x funds.  These funds ramp up returns, but also multiple losses significantly.

Commodity Producer Stocks

Instead of investing directly in the commodity itself, many investors choose to invest in the company that makes or extracts the commodity.  This can be a good play because these companies usually benefit as well from rising commodity prices.

However, since you’re not invested in the actual commodity, but a company, you usually gain more liquidity and safety.

Investing in the company can also be a better play if the company pays a dividend.  As such, you can receive a payment for ownership, where owning the commodity directly or through and ETF, you won’t receive one.

Investing in a producer that produces multiple commodities can also be a way to diversify across the sector, and help smooth any bumps in the road.