Commodities Mutual Funds

Professionally managed commodities mutual funds offer more diversity and potentially higher yields than solo investing in a single market. A mutual fund is an investment company which invests pooled assets from a group of shareholders with likeminded objectives and interests. Pooling resources enables shareholders to make larger, more diverse investments in both domestic and global markets. Open-ended mutual funds also offer shareholders more opportunities to realize returns on long-term investments, rather than taking a gamble on stocks which may not prove to be profitable. Contributions made to the fund are managed by a broker who is employed by the company to make safe, high-yield investments to diversify portfolios. Shareholders are paid dividends according to their proportion share in the fund. Commodities mutual funds are those companies which invest in naturally grown or cultivated consumer goods, such as crude oil, wheat, soybeans, sugar, cotton or livestock. Other commodities include precious metals such as gold, silver, and platinum; industrial ores; and natural materials harvested for building trades such as lumber and stone.

The problem with investing in commodities futures is that the production and pricing of these kinds of goods depends on climatic, socioeconomic and political changes. When droughts, flooding, tornadoes and tropical storms upset the delicate ecosystem in and outside of the United States, crop yields are directly affected. Agricultural regions which suffer damage yield fewer crops; and that shortage creates an increased demand and higher prices in the stock market and the supermarket. The fact that commodities are so easily affected by the economy, weather and disease makes investing in futures a risky business. Commodities can fluctuate wildly within the same day or the same week. A highly volatile market plagued with bank mergers, takeovers and closures; an all-time high in housing foreclosures caused by irresponsible sub-prime lending and sky high adjustable rate mortgages; and a nation held hostage by an over-dependence on foreign oil may all have an adverse impact on commodities mutual funds. "The Lord knoweth the days of the upright: and their inheritance shall be for ever. They shall not be ashamed in the evil time: and in the days of famine they shall be satisfied" (Psalm 37:18-19).

Add to this volatile economic mix, the threat of crop loss due to global warming and abnormal weather patterns, and one can easily see why investing in agricultural products can present a formidable challenge. In spite of these challenges, the goal of experienced traders is to forecast when products will be plentiful, predict the best time to buy or sell, and research past performance and other economic indicators to successfully gauge potential profitability. But, investing in commodities mutual funds reduces a significant amount of risk because managers strive to diversify investments, choosing to purchase stock and securities in several companies representing various consumer goods. If a long hot summer fails to yield a good wheat crop, funds invested in lumber or other products might result in high yields; and the lion's share of company funds remains safe.

The risk of investing in commodities mutual funds is somewhat lessened because of federal requirements to provide full disclosure to shareholders and the general public. The Securities and Exchange Commission (SEC) requires that mutual funds publish an annual report, including past performance, the objectives of the fund, actual earnings, and charges or fees assessed shareholders. Prospective shareholders can log online to fund websites and download a current prospectus, or contact the investment firm by telephone or mail. Investors should look for companies which have a proven history of high performance, consistent high quality management, and portfolio diversification. Diversifying investments in commodities mutual funds is important in safeguarding shareholder investments in the event of an un-forseen dip in the market. Reviewing the company website and past trading decisions will give prospective shareholders a good idea about whether the fund is stable and where it is headed financially.

Crucial to an investor's decision to buy shares in commodities mutual funds is the mission and vision of the fund. Proponents of socially or environmentally responsible investing may not want to put money into companies which advocate hunting wild animals or dumping toxic waste into the nation's rivers and streams. Advocates of socially responsible investing will want to buy into funds which support human rights issues and denounce practices of racial or gender discrimination, genocide, or apartheid. For example, socially responsible shareholders may balk at investing in South African diamond mines which implement unfair and denigrating labor practices. Environmentally responsible investments are made in companies which advocate industries and innovative products which help protect endangered species and the environment. Funds which invest in green industries, such as biotechnology, sustainable agriculture, alternative fuels, and vehicles independent of foreign fuel may yield the highest returns, as global markets embrace efforts to save the planet.

Experienced fund managers, brokers, and traders may recommend buying shares in commodities mutual funds which invest heavily in precious metals, such as gold or platinum, which hold or increase in value; crude oil, currently the world's primarily source of fuel; and commodities-related to emerging green technologies. Going green might prove to be the most lucrative of several long-term emerging money making ventures. Shareholders should exercise patience in realizing returns on long-term investments in agricultural products whose value changes with the wind. But one thing is certain, just as seasons change, so does the economy; and those who can endure seasons of unfruitful investing will one day reap a bountiful harvest through perseverance. "Now He that ministereth seed to the sower both minister bread for your food, and multiply your seed shown, and increase the fruits of your righteousness;)" (II Corinthians 9:10).

Commodity Index Fund

A commodity index fund may be a good investment opportunity for prudent investors. Commodities are usually raw materials, such as metals, minerals, and fuels, or agricultural products, such as grains, cotton, coffee, and cocoa. Livestock such as cattle and hogs are also types of commodities. These products are generic in nature which means that it doesn't make much difference which producer mines, drills, grows, or raises them. For the most part, oil is oil and soybeans are soybeans, though the quality may be graded. Some people trade in commodity futures, but these are generally considered to be risky and speculative investments. Instead of buying and selling the actual commodities, the traders buy and sell futures contracts which are standard contractual agreements set by exchanges such as the Chicago Board of Trade. These contracts specify a set quantity and grade for particular commodities. The traders rarely possess or take delivery of the products, but offset purchases and sales with other purchases and sales before the delivery date. The exchange clearinghouse handles the trading accounts. Money is made when a trader sells a contract for more than its purchase price and money is lost when the trader is forced to sell the contract, before the delivery date, for less than its purchase price. Commodities are usually considered to be a volatile investment. The rewards may be great, but so are the risks. Investors may prefer the lower volatility of a commodity index fund instead of taking higher risks with futures contracts.

An index fund, of whatever type (stocks, bonds, commodities), usually provides more safety than ownership of individual stocks, bonds, or futures contracts. This is because an index fund is a collection of individual investment products. For example, the well-known Standard and Poor (S&P) index consists of 500 large cap common stocks. A committee decides which stocks to include based on specific rules. Though not a fund itself, several companies offer funds that copy the S&P. Additionally, many mutual and index funds compare their periodic returns to that of the S&P to provide a benchmark for current and potential investors. A commodity index fund would include a number of commodities. This way, instead of investing in futures contracts, an investor would own small bits of several commodities. The fund's managers may need to follow pre-set rules regarding the fund's makeup. For example, a particular fund may be allowed to consist of only a certain percentage of oil and a lesser percentage of gold in addition to other commodities. Some funds may specialize in certain commodities, such as minerals or fuels. Regardless of the pre-set rules, the fund's managers must adjust the ownership of commodities to stay within those rules.

An actively managed commodity index fund provides the managers with more flexibility. Though certain guidelines may prevail, actively managed funds can be adjusted to meet specific market conditions and to take advantage of identifiable market trends. A prospective investor needs to do her homework when evaluating investment opportunities. This is true, even for investors of the more traditional stocks and bonds. But it's especially true for commodity investors. In fact, financial experts recommend that commodities make up only a small percentage of an already well-diversified portfolio. Diversification enables investors to reduce risk to the overall value of the portfolio by investing in a variety of investment products. A good, solid mix of mutual funds that includes both stocks and bonds is the foundation for a well-designed portfolio. The addition of a commodity index fund can add additional value and, perhaps, offset losses in stocks and bonds due to inflation or certain crises. Some people believe this advice from King Solomon can apply to investment portfolios: "Cast thy bread upon the waters: for thou shalt find it after many days. Give a portion to seven, and also to eight; for thou knowest not what evil shall be upon the earth" (Ecclesiastes 11:1-2). Diversification is an important principle for wise investing.

Historically, the value of commodities goes up when the value of stocks and bonds go down, but the commodities go down in value when stocks are booming. A simplistic reason for this historic trend has to do with interest rates and inflation. Basically, inflation is associated with higher interest rates. These higher rates mean that corporations must pay higher costs to borrow money. This additional borrowing expense lowers a stock's earnings per share and the value of the company's stock decreases. Conversely, in inflationary times, the supply of commodities usually is less than the demand. The economic supply/demand seesaw means that commodities are more valuable when the demand exceeds supply. A commodity index fund can be an important, and valuable, asset during inflationary periods.

Again, it's important for an investor to do her homework before putting money into a commodity index fund. In addition to knowing whether the particular fund follows pre-set rules or is actively managed, the investor should look at the fee structure. A wise investor will be sure that the fund's results justify the fees. She should also look at each fund's historic performance record. Though past results do not guarantee future performance, it's still advisable to choose a commodity index fund with a strong track record over one that's mediocre. By educating oneself on various investments and making sure that one's portfolio is already diversified with a good mix of stock and bonds, the investor may find that adding a small percentage of commodities is a good hedge against inflation.





Copyright© 1996-2015 ChristiaNet®. All Rights Reserved.