Commodity Index Funds

Commodity index funds are playing a growing role in retail investor portfolios. In many ways, investors have viewed commodity trading as the purview of large investors, the very wealthy and the highly leveraged. These spot trades bring to mind rough men on a trading floor shouting the prices of pork-belly futures. Some direct commodity markets are virtual, in that commodities such as energy are traded and the trades executed real time.

Instead of the real-time trades required of the direct commodity or commodity futures investor, the commodity fund provides the retail investor a method to opt-in to a segment of the securities market viewed as an inflation hedge and a method of diversification into an investment segment generally viewed as having a negative correlation to stock performance. When stocks rise, commodities tend to fall and vice versa.

Commodity-based index funds allow the everyday investor to buy a piece of the “stuff” that is the future raw material market. Human beings consume commodities. Whether precious metals go into jewelry or electronics, there is still a demand. Oil and other fossil fuels continue to be critical raw materials in all aspects of production and consumer demand for energy. Whether it is growing corn or finding fossil fuels, resources generally grow harder, not easier to produce. Investing in commodities is a means of placing today’s dollars into tomorrow’s demand areas.

The largest advantage commodity index funds provide the small to medium investor is that these funds alleviate the need to become an expert. You need not be an active day traders, or a psychic with a direct line in to the future price of gold. All you need to do is find the right fund with the right managers, a proven track record and a solid investment philosophy for managing your money.

Commodity index funds are a more secure investment than the other commodities vehicles, including commodities based electronically traded notes. These notes have a greater loss risk as it is not just the commodity performance but also the financial stability of the lending institution that can damage returns.

Never forget: not all commodity funds and commodity indexes are created equal. As with any mutual fund, different funds not only deliver different rates of return, they also have different fees and expenses. The best funds are the ones where you do not have to earn 10% to keep 5%. Look for lower management costs when selecting a commodity index fund to diversify your investments.

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