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Commodity ETFs: In Plain English

Jun 18, 2008
Understanding commodity ETFs (Exchange Traded Funds) is actually easier than it sounds. The first commodity ETFs were introduced in 2004 and skyrocketed in the first year. Commodities are things found in nature, like corn, gold, silver, natural gas, and even cattle. Corporations amass large amounts of commodities and sell them off in smaller parts (funds) via commodities indexes (like NASDAQ indexes).

There are three major umbrellas that commodity ETFs fall under. These include metals, energy and agriculture commodities. An investor would benefit from a portfolio that includes commodities from all three major groups.

Metal commodities include precious metals like copper, gold and silver. These metals are used to make jewelry, for housing construction, and in industries and production including aerospace and pharmaceuticals. Metal prices can effect retailers who sell jewelry, the cost of real estate, the price of medicines, even services like plumbing. The stability of metals was questioned in the early 1900's when the United States decided to use paper certificates rather than gold to back US currency. Many people shied away from investing in gold at that point due to the popular notion that gold would become essentially worthless. Gold, however, continued to rise right along with inflation and is fast becoming one of the most traded commodity ETFs.

Energy commodities are made up of crude oils, coal and natural gas for the most part. The price of gasoline has an effect on just about every part of our lives. When the price of a barrel of oil goes up, the price of gas follows suit. When the transportation industry has to pay more for gas, they have to charge more to transport goods. When they charge more for goods, the producers have to charge us more to buy them. In May, 2008, it cost one trucker nearly $1,000 to fill up his tank. As a consumer this is never good news. As an investor, however, knowledge that prices are going up means that it is time to buy, not only in energy commodity ETFs, but in anything that is affected by the cost of energy.

Agriculture, or farming, commodities include anything that is grown or raised by farmers or ranchers. The price of food is determined by the price of agriculture, as is the clothing industry, construction, household goods, furniture, and just about anything that uses cotton, rubber or wood. Corn commodity ETFs are definitely ones to watch. Not only because corn is used to feed us, but also because it is being tested in laboratories to make a new kind of fuel.

A beginning investor should not overlook commodity ETFs as they can be fairly inexpensive to add to your portfolio. Even experienced, long-term investors should take the time to learn about this somewhat new market.

You can learn more about commodity ETFs by searching the internet, subscribing to major publications that focus on business and the stock market, or by watching television news shows that discuss financial issues. If you still don't understand them, give your broker a call and ask him to explain commodity ETFs - in plain English.
About the Author
Ryan helps you understand commodity ETFs and how you can profit from investing in a commodity ETF.
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