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Building Wealth With a Commodity ETF

Updated on August 24, 2015

Commodity Bull Market

Before I get into what a commodity ETF is and how to use it to build wealth, it would be of little value unless the general performance of commodities in general is included in the conversation.

Commodities of course were were in the middle of a bull market when the economic disaster hit, which caused commodity prices to plunge. It must be understood that this has in no way stopped the bull commodity market, it has only postponed it.

So once the economic conditions change, demand for raw materials and agricultural products will resume in a big way, and the commodity bull market will continue.

The consequences of the economic downturn are a blessing in disguise for commodity investors, as it will prolong the length of the commodity bull market, giving investors even a longer timeframe to participate.

What is a commodity ETF?

Basically a commodity ETF or exchange traded fund is a tracking index of the prices of an individual commodity or grouping of commodities, such as gold or silver.

One strength of them versus traditional direct investing in futures is there are no more risks than your original capital. Leveraging to invest in futures, on the other hand, can cause you to lose more than your initial capital.

What this means is investing in a commodity ETF is a pure price play. Price is the only thing connected to profits or losses, and so is directly related to supply and demand.

Factors to Consider

Leverage

A strength of commodity futures is the leverage involved, so when a commodity ETF invests in futures, there is extra capital available to reinvest in what is usually interest-bearing government bonds.

What this does is help defray costs related to doing business and an index, and have also been used to pay out dividends.

Expenses

There aren't too many expenses connected to operating an index; at least in contrast to other investment vehicles, but there are other expenses to consider.

For example, there could be raw material storage costs, trading expenses and other general charges which must be included in your decision-making and understanding of what you're getting into.

On the positive side, most commodity ETFs don't trade in and out of the market as other funds may do, so that can cut down on expenses as well.

Still, all this has to be taken into consideration, as with all things being equal, expenses could be the determining factor in success and failure.

What you need to know about Commodities to Succeed

Like other investment vehicles, commodity ETFs offer a variety of types which focus on particular sectors. For example, some may only invest in gold, or others in certain agricultural products, etc.

What we need to do is keep up on the supply and demand factor of what the particular commodity ETF and its focus is on.

In the case of a basket of commodities, it's probably more useful to look at the overall economic picture. That's because nations and companies that acquire raw materials will cut back in slower times, and so that will have a direct impact on price movement.

Concerning a commodity ETF which focuses on a single commodity, it's much easier to do you homework to understand where prices will head.

Agriculture Commodities Should Do Very Well For Years

Using a Commodities Broker

While many people may feel more comfortable using a commodities broker to do their trading, it's still a good idea to at minimum have a general grasp of what the overall commodities market is doing, along with individual commodities you're interested in, or have invested in.

This empowers you to be able to ask questions intelligently in order to keep your broker on his toes, or in check, so he knows you're watching what's going on with your investment.

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    • profile image

      BxL 

      8 years ago

      Great article! Rated as useful and thumbs up. I am looking forward to investing some money into gold bullion. Even though the value of silver is growing, a gold investment is more efficient. You simply can't compare the results of a gold investment with silver.

      Read more about gold bullion at http://goldbarbuy.blogspot.com/

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