Coffee to Copper Why Commodities Should Have a Place in Your Portfolio
BCI Coffee. Gasoline. Oil. Cattle. Gold. At first glance, a seemingly disparate collection of consumables without relation to one another. Look again, and it may become more evident that they’re commodities, basic goods you use every day. Notably, commodities as a class have uses other than in the tank of your car, on your kitchen counter, or adorning your hands. Commodities are also portfolio diversifiers and can play a key role in balancing out a traditional stock/bond portfolio1. To better familiarize you and your clients with this intriguing asset class, below are a few Aluminum to Zinc facts about commodities.
news you can use: An ETF Securities Commentary
what’s inside? One of These Things is Much Like The Other Commodities are basic goods used in commerce that are easily interchangeable with other commodities of the same type2. A commodity’s quality may vary marginally from one producer to the next, but, ultimately, they should be almost uniform from
one to other3. For example, an ounce of gold mined in China should have the same purity as an ounce of gold mined in South Africa. Arabica coffee beans grown in Brazil should be of the same quality as the same beans from Vietnam.
From Cows to Corn Commodities are grouped into two categories, hard and soft4. Hard commodities include natural resources like oil, copper, gold, aluminum, zinc, steel, and natural gas. Select hard commodities like copper and oil can serve as barometers of economic strength by determining their total worldwide demand4. Soft commodities comprise of agricultural goods such as wheat, corn, coffee, cotton, soybean and sugar as well as livestock, like lean hogs and cattle. It’s All About Diversification Many portfolios typically comprise of just two asset classes, stocks and bonds. However, investors tend to further diversify their portfolios, allocating a portion of their holdings to non-traditional securities such as commodities. These securities are not correlated to the broad markets, and may also help enhance return and hedge against undesirable economic events.5 Of note, since 2000, there has been only a 35% correlation between commodities and the stock market6. Where Cows Meet the Pasture Commodities can be an important source of portfolio diversification. Deciding on which commodities in which to invest depends on your investment strategy and other personal preferences. The list of commodities from which to pick is lengthy, and includes more traditional commodities like gold, silver, oil, cattle and natural gas, to more exotic commodities like orange juice, canola oil, and even butter futures7. The tricky part of investing directly in commodities is that when the futures contract comes due, you must take possession of the commodity itself. Since it’s unlikely you want a herd of cattle grazing in your front yard, an alternative choice is to invest in a basket of commodities via a low-cost ETF.
commodities 101 What are Commodity ETFs? ETFs are a simple and efficient way to introduce your portfolio to commodities. ETFs can also be a low-cost alternative to investing in this asset class, depending on the fund itself. The ETFS Bloomberg All Commodity Strategy K-1 Free ETF (BCI), for example, has an expense ratio of just 29 basis points, making BCI one of the lowest-cost product of its type in the U.S. Products like this allow you to invest in commodities without owning the commodity itself. ETFs like this typically invest in company stocks related to the commodity, or they consist of futures and derivative contracts that track the price of the underlying commodity, or indexes. Why Buy Commodities in an ETF Wrapper? If you want to invest in commodities, you have several options. One is to purchase the commodity futures individually8, which is not advisable for anyone other than highly sophisticated investors familiar with futures trading. The other is to invest in commodity-related companies, like e