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Why Investors Should Be Diversifying With Commodity ETFs

One of the most enticing strategies in investment is to put some portion of your funds into exchange-traded funds, or ETFs. ETFs are funds that act similarly to mutual funds but are passively managed. Passive management reduces administrative costs and increases the profit individual investors make by reducing expense ratios over time. ETFs also broadly follow markets, allowing investors to hedge their bets across a wide range of assets rather than focus directly on a single company.

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However, figuring out what ETF to invest in can be quite difficult due to the hundreds of market-based funds, sector-specific funds, and more. Dialing on an industry or sector that you know well from work or hobbies is usually a good base strategy. One type of ETF that many people can associate with to at least some degree is the commodity ETF. These ETFs represent actual, physical goods, including agriculture products like soybean and corn and rare earth materials like cerium and yttrium that are used in modern electronics. Here, you’ll find three enticing reasons to invest in the ETFs that represent these goods.

1. Rare Opportunity
Unlike other goods that have easy holding opportunities if you’re looking to purchase and hold onto the product, commodities usually have to be bought and sold in large quantities (and quickly) to allow for a profit to be realized. That means that individual investors generally aren’t allowed to directly invest in commodities since they don’t have the capacity to hold onto those goods in any way. Instead, ETFs allow much larger institutions to gain access to these commodities, in turn, institutional investment allows those funds to give exposure to investors without any direct investment in those physical goods necessary.

In general, investing in commodity companies as an individual investor is difficult. ETFs that do represent these markets provide investors a rare opportunity to gain exposure to the commodities they’re interested in without many of the risks traditionally associated with those markets.

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2. Focus across sectors
As mentioned briefly in the introduction, ETFs allow investors to distribute their money within a fund that represents multiple assets. Distributing across assets creates unique opportunities for commodity ETFs. For example, a commodity ETF that focuses on agricultural products will not only focus on corn produced. Instead, that ETF will have assets across both popular products (like corn and wheat) and more exotic products (like pineapples and artisan apples). For the average investor, the distribution means that in the case of a bad production year, your investment will not suffer quite the consequences they would if you invested in one of these products alone. If corn has a bad planting year, the rise in fruit production may increase by an amount that will offset those losses somewhat. An ideal outcome would be that all agricultural products represented in that fund have fantastic production years, allowing your investment to continuously grow over time.

3. Flexibility in trading
ETFs are structured similarly to mutual funds in that they are owned by a parent fund, and that fund distributes its portfolio across many assets. However, traditional mutual fund shares don’t get traded on the stock market – instead, they are traded only a single time every day, and are only traded with the parent company that distributes the mutual fund. Single timepoints for trading means that the fund’s asset value is only priced once per day, and that dictates the value of all trades for the next day. On the other hand, ETFs do get traded on the stock market, allowing shares to be bought and sold the entire time that markets are open each day. The full-day trading window allows investors to use a range of strategies like short selling, trade order floors and ceilings, and more to maximize investments.

Essentially, the open window for ETF trading allows investors to purchase shares at the most opportune time. Certain commodities can drastically fluctuate in price seasonally or even daily, so the open window is extremely useful for commodity ETFs. For example, oil prices can change dramatically due to inter-country trade agreements or due to new oil field discovery. By having the flexibility to buy into an ETF at any time on a given day, investors could jump on that opportunity quickly.

Exchange-traded funds can be a fantastic way to diversify the assets you invest in. Commodities are physical goods that are generally necessary for some subset of the population, but they can be hard to invest in at any scale if you are a traditional solo investor. Commodity ETFs give you the opportunity to get some exposure to those much-needed commodities without needing the massive capital that funds need to invest in these opportunities. But even within this subset of ETFs, there are many options to choose from. Understanding exactly why commodity ETFs are beneficial opportunities will help you make informed, educated choices on the best fund for long-term investment.

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