Wednesday, July 18, 2007

How (and why) to invest in commodities

When we speak about diversification we always provide lip service to investing in assets with low correlations, but since most take this to mean different stocks (equities) we sometimes mention other assets but few know how to invest in these other assets such as commodities.

Because of that lack of knowledge SmartMoney looks at ways that investors can invest in commodities without having to trade actual commodity contracts.

Funds Allow Small Investors Access to Commodities (Pimco Commodity Real Return, Oppenheimer Commodity Strategy Total Return, Fidelity Select Energy, Excelsior Energy & Natural Resources) | SmartMo:

Let's begin with the why, as in "why would you want to buy commodities":

Shortest version: because they have a lower correlation with equities (see Greer 2000). Thus even if they offer lower expected returns, they can lower overall portfolio risk.

From SmartMoney:
"with the increasing globalization of the world you can't get diversification by just going outside your country. It's all about getting outside of equities.'"
The Smartmoney article goes on to suggest three ways to do this without actually buying the commodities.
  1. Buying equities--for instance buy oil companies or sector mutual funds that buy equities.
  2. Buy Exchange Traded Funds (ETFs) that invest in commodity indexes. (for instance see
  3. Buy mutual funds that buy commodities.


Anonymous said...

Can you help us understand why commodities have an expected return?

Franco said...

I absolutely agree. The main reason for buying commodities is the low correlation with shares. Another reason is their long-term scarcity in a world that needs more and more of them, while very highly populated countries keep their development at high rates. The usual suspects like China, India, Brazil, and others, will keep draining resources to increased rates.
Just think about oil and gas: the price will remain high also due to geopolitical factors, despite the R&D efforts to exploit renewable sources of energy, as explained in the
Financial Consultants Guide.

Keep a long-term view of your investment in the commodities, either directly or through funds and other instruments and maximise your return/risk profile.

natan blog test said...

Try ETCs (electronic traded commodities). started in 2006, and very similar to ETFs, you can track specific commodities like wheat. (scroll to bottom of page)