How to Invest In Commodities

With Federal Reserve money printing ballooning in the past year, concerns over inflation have risen. Some argue that commodities will rise if inflation kicks off in earnest, and that the mushrooming stock market from the March ’20 lows is evidence of that. Others foretell of commodities rising when confidence in government fractures.

Regardless of what the cause, the consensus prediction is that commodities are on the upward trend in the coming years but how to invest in commodities?

Commodities can be anything from soft products, like agriculture and livestock, to hard products, like crude oil and precious metals. Buying and selling these products is known as commodities trading, and it works differently than an equity security.

Famously, commodities’ prices can fluctuate wildly, especially during economic depressions, wars, and pandemics. For example, American oil barrel prices fell into the negative while supply chains for food, products, and everything else stalled during the 2020 meltdown.

So, how do you buy commodities and which ones are worth it? 

Difference Between Commodities and Stocks

When buying shares of a company, you’re buying a piece of ownership alongside other investors. The expectation is that the company will make money, and the value of your shares will go up. Some investors even pick dividend stocks that make quarterly or annual payments to shareholders.

Commodities are different in that they represent the actual physical products being sold by companies. This means they’re often held for much shorter timeframes before being transferred to someone else.

Futures contracts are used in commodities trading. In these deals, traders essentially bet whether the price of the commodity in question will go up or down. Commodities traders also use these futures contracts to hedge against wild price swings, which happened during the global pandemic.

Commodities and stock markets do tend to display correlative price behaviors. When the price of oil is rising, for example, the stock market tends to be in a recession (it’s not a golden rule but more a rule of thumb).

High inflation can also cause commodities prices to go up, which in turn support them in outperforming both stocks and bonds in that market.

Your options to invest in commodities are to buy the physical commodity (costing you overhead to store or sell), buy futures contracts, invest in specific company stocks dealing with that commodity, or invest in a commodity ETF and mutual fund.

The latter option provides exposure across a broad range of diversified commodities through futures contracts. This way you own more with less.

Here are three popular commodity ETFs to consider. Each has a proven track record you can check online to perform your own due diligence.

1. PowerShares DB Commodity Index Tracking (DBC)

Invesco’s DB Commodity Index Trcking Fund (NYSEARCA:DBC) is a broad index fund that tracks the movement in market prices through futures contracts in 14 of the world’s most heavily traded physical commodities.

DBC includes investments in crude oil, gasoline, precious metals, and agriculture like corn, sugar, soybeans, and wheat. This broad portfolio gives it wide exposure to market fluctuations.

Although DBC share price has recovered, to trading prices seen prior to the 2020 crash, they pale in comparison to highs of near $50.00 before the 2008 market crash. Since then, prices in each of these commodities have remained relatively low, especially since it’s an oil-heavy commodity fund.

This means it took a huge hit when travel and tourism grinded to a screeching halt and could still have limited growth potential. 

2. United States Commodity Index (USCI)

The United States Commodity Index Fund (NYSEARCA:USCI) is an ETF from USCF Investments that tracks the SummerHaven Dynamic Commodity Index Total Return. It’s another broad-market investment in 14 commodities futures, but at different levels of exposure.

In fact, it consistently buys and sells different commodities futures, depending on the most profitable benchmark for that period. Exposure to oil in its January 2021 benchmark was limited to unleaded gasoline, heating oil, and natural gas.

Like DBC, it’s declined alongside the market, but the magnitude of the move isn’t as pronounced. Indeed since the March 2020 lows, DBC has been slowly but steadily grinding higher, suggesting that inflation is seeping into the economy and being felt at the supply level.

Nevertheless, by the start of 2021, USCI share price had still failed to breakout. It’s more heavily weighted in food, with investments in cocoa and sugar, along with a lot of soybean products, plus a spread across four precious metals (gold, silver, copper, and tin).

This lack of oil futures is a short-term benefit, but it could harm the ETF if and when airlines, cruises, and travel returns to normal. Even with OPEC limitations in place, crude oil could have a breakout year in 2021 that DBC is better positioned to gain from.

3. iShares S&P GSCI Commodity-Indexed Trust (GSG)

The iShares S&P GSCI Commodity-Indexed Fund (NYSEARCA:GSG) is another broad ranged commodity index fund that tracks futures contracts. It reaches across energy, industrial and precious metals, livestock, and agriculture to provide returns for its investors.

It fell to a low of $7.50 in March and rose back to over $10.00 per share by year end. However, it’s still trading shy of the $15.00 range it traded at prior to the pandemic.

This shows how far the economy has to go towards recovery. We’re rich in resources with heavily fluctuating prices that got crushed when the world entered “shutdown mode.”

Like the other funds, GSG will likely continue to pace higher as long as big stimulus checks are written on the fiscal side of the aisle and big money printing on the Federal Reserve side.

The 2020s are a decade like no other. It started with a worldwide pandemic that spurred panic shopping sprees, government stimulus, and a new way of doing business to survive.

People are unemployed while businesses practice contactless payments, deliveries, and more. The age of automation is here, and it’s unclear who will survive economically.

Regardless of who succeeds, whether electric vehicle manufacturers or less likely, airlines, commodities will form the basis of their successes, and so likely offers a diversified safe haven to park capital over the next few years.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.