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Trading Commodity ETFs - A Short Beginners Guide

Updated on February 16, 2013
Commodities | Source

What is an ETF? What are the advantages of investing in an ETF? What are the advantages of investing in commodities? These are some basic questions that a beginner might have when getting started with investing. Read more below to learn the answers to these questions.

What Is An ETF?

If you are a beginning investor, there are a lot of terms that are probably foreign to you. Investing can be very challenging to become proficient at. The proper research will help you advance from a novice investor to a more experienced investor. This usually translates into more informed decisions and better returns for your portfolio.

Exchange traded funds, or ETFs, are funds that allow you to add diversity to your portfolio. ETFs come in many different types and classes, ranging from very specific funds to very broad funds. They allow you to easily add diversity to your portfolio because they can be traded just like normal common stock. Unlike mutual funds, ETFs can be traded intraday, and often do not have a minimum purchase requirement. This allows you to quickly and easily add more diversity to your holdings.

Commodity ETF Basics

One area where ETFs really shine is in the commodities market. Trading commodities, especially for home-based investors, can be very difficult and expensive. This is especially true if you're looking at agriculture commodities, like corn, wheat, or sugar. It is simply not feasible for home-based investors to buy bushels and bushels of wheat to store at their home until prices go up.

What commodity ETFs allow you to do is to add exposure to these commodities without physically having to purchase and store them yourself. Because they can be traded like normal common stock, purchasing an agriculture ETF like the PowerShares DB Agriculture Fund (DBA) is as easy as purchasing any other stock, and you are now adding widely traded agricultural commodities to your portfolio.

There are leveraged ETFs on the market. What that means is that if you would like to make 2 or 3 times what a specific commodity is returning, you can invest in an ETF that tracks 2x or 3x the price of the specific commodity. Inverse ETFs will do the opposite, in that they will return the opposite of what is happening in the market. Inverse ETFs can also be leveraged (inverse 2x return).


Different Commodities To Think About

Precious Metals:

  1. Copper
  2. Silver
  3. Gold
  4. Platinum

Petroleum Products:

  1. Crude Oil
  2. Natural Gas
  3. Gasoline

Agriculture Products:

  1. Livestock (cows, pigs)
  2. Corn
  3. Wheat
  4. Rice
  5. Sugar
  6. Soy Beans

Investing in some of these commodities, like gold, agriculture, and oil products is a good way to hedge against future inflation. Many investors are looking for ways to protect their retirement portfolios against future inflation, and these commodities will provide that protection.

How Do I Get Started?

Trading commodity ETFs is most easily done through an online trading platform. Without having to go through a broker, the cost is usually just whatever your online broker charges for a commission. Because of how they are structured, ETFs do not have many of the associated costs that most mutual funds have. This means that more of the stock return will go directly to you.

Like any investment, be sure you research the commodity ETF that you are interested in purchasing before jumping into the market.

Disclaimer - Remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.


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