Commodity ETFs (exchange traded funds) are investments that are traded on an exchange, like stocks are, but they are hedged against factors such as inflation, which can drive down the value of stocks. When you buy an ETF, you are buying a share in a fund linked to a specific commodity such as corn, wheat, gold, oil or livestock. Some ETFs represent a specific amount of the commodity, such as an ounce of gold or a barrel of oil. Other ETFs are based on how a commodity is performing-or how its value is holding up-in the market.
What are my options?
You can invest in a single ETF that follows only one commodity. For example, you can invest in a livestock ETF. When you buy a share of the ETF, you have a share in livestock, but you don't have to take care of the animals. You will own the ETF for a specific length of time, and, if prices for livestock go up during that length of time, your investment value will go up accordingly. Or, you can invest in a commodities ETF that covers a range of different commodities, not just livestock.
You may also have your eye on investing in oil through commodity ETFs. Considering how volatile the price of oil can be, given that it went from $130/barrel to $35/barrel in less than a year in 2008, you can easily see how you could make a pretty penny on such an investment. You can also see how you might lose a pretty penny on such an investment if the price of oil dropped.
What are the pros and cons?
The upside to commodity ETFs is that the prices of ETFs are not directly linked to stocks or any currencies. The downside to commodity ETFs is the fact that they are so volatile, and most ETFs haven't been traded long enough for any cycle or predictable trends to have been established. As a result, commodity ETFs are considered very risky investments. Even though they are possibly lucrative, they depend on the fluctuation of the commodity's value in the length of time in which you are invested.
 | What are ETFs? Exchange Traded Funds combine an index fund's diversity with a stock's flexibility. Learn more about what they can do for your portfolio. |
 | ETFs, or exchange-traded funds, have grown in popularity. These investment vehicles can be described as index funds that are traded similar to stock shares, and they both follow the performance of an index. Many investors often ask themselves whether they should use ETFs or index mutual funds. |
 | An exchange-traded fund, or ETF, is a fund that follows an index. An inverse ETF is an investment strategy that seeks to make a profit when prices fall. Many investors turn to inverse ETFs when the markets are falling with the goal of hedging portfolios. |
An ETF seems like the perfect balance between a stock and a mutual fund. It offers diversity, yet you can still buy and sell it like a stock. But the popularity of ETFs doesn't mean they are appropriate for you. |
Exchange-traded funds sprung onto the investment scene nearly 15 years ago, but they've been stealing the spotlight from their more mature mutual fund cousins in recent years. |
