Commodity funds invest in raw materials or primary agricultural products, known as commodities. These funds invest in precious metals, such as gold and silver, energy resources, such as oil and natural gas, and agricultural goods, such as wheat. Commodity funds may also invest in the companies that produce these commodities.
What are some benefits of commodity funds?
Because of their unique makeup, commodity funds deliver several benefits to investors, including:
- Portfolio diversification. Historically, commodity funds have had low correlation with
stock market movements, which makes them a valuable source of diversification in a
- Protection against inflation. Commodity prices tend to rise with inflation, making
commodities one of the few assets that benefits from inflation.
- Potential financial growth. Commodity prices rise and fall in tandem with supply and
demand. The more a commodity is in demand, the higher its price will rise, delivering
higher profits to the investor.
What are the risks associated with investing in commodity funds?
Commodity funds have historically provided investors with an opportunity for
diversification, downside protection and upside potential. However, as with all types of
investment, commodity funds carry risk, and may not be right for every portfolio.
Commodity markets can be volatile, which can expose investors to the possibility of
considerable price fluctuation. Commodities themselves and commodity companies are also
exposed to political, economic, foreign currency and exploration risk.