Commodity Fund

Including commodities in your investment portfolio can have many benefits. To give an introduction to what alternatives you have as an investor, and how it works to invest in commodities, the following questions will be answered:

  • What is a commodity?

  • Why invest in commodities?

  • How to invest in commodities?

  • What is a commodity fund?

What is a commodity?

A raw material an asset that is extracted directly from nature, e.g. wood, oil, coffee beans and metals. There are different categories in raw materials:

  • Soft commodities (or "softs") include raw materials that are grown, e.g. coffee, cocoa, sugar, corn, wheat, and soybeans.

  • Hard commodities, hard commodities are raw materials that are extracted by digging in the ground, e.g. gold, silver, copper, and lithium.

  • Energy raw materials are directly related to energy and include electricity, gas, coal and oil.

Why invest in commodities?

For an investor, an investment in commodities entails a diversification of the portfolio as this asset class has a low correlation with the broad stock market. An investment portfolio that consists of several uncorrelated assets entails a higher risk-adjusted return. Investing in commodities can also be a good protection against inflation as you can historically see that commodity prices increase during periods of high inflation.

How to invest in commodities?

There are different ways to invest in commodities. You can invest in futures contracts, shares, exchange traded funds, daily traded funds, or directly in the physical commodity.

What is a commodity fund?

An investor-friendly way to gain exposure to the commodity market is to invest in a fund. When you invest in a fund, you let a manager allocate the assets in the fund, and you avoid the active work of keeping track of the market. This is advantageous if you want to effectively include commodities in your investment portfolio. Investing in funds entails a management fee, so you should always read the fund fact sheet before investing.

In the category of commodity funds, you can choose between daily traded funds and exchange traded funds (ETFs). The difference between these is that daily traded funds are actively managed, and are traded once a day, while exchange traded funds are regulated and can be bought and sold at any time during the exchange's opening hours, just like a share.