As an asset class, commodity funds are designed to invest in key agricultural products and raw materials collectively referred to as “commodities”.
For instance, they invest in gold, silver and other precious metals, but also energy resources, like oil or natural gas. Agricultural goods like wheat are another example, yet commodity funds can also invest in companies that are producing such commodities.
Understanding types of commodity funds
True commodity funds, Index commodity funds and futures are the three different options open to investors.
Index funds track an index that features a range of commodity assets, while true commodity funds directly invest in an underlying commodity asset. Futures-based commodity funds provide exposure to commodities via investing in futures contracts, but no actual commodity assets are ever invested in.
What are the advantages of commodity funds?
The unique nature of commodity funds mean that they can provides multiple benefits for investors.
They can aid with portfolio diversification, as commodity funds typically display a low correlation with shifts in the stock market. They can also provide a measure of protection from inflation; usually, the prices of commodities increase with inflation, making them among the rare asset classes that can benefit from such a financial climate.
Potential financial growth
Commodity prices spike and drop off according to supply and demand. As a result, the higher demand for a commodity there is, the higher its price will rise. This offers outstanding potential for financial growth.
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