What Is A Commodity
Are you interested in mutual fund advice on commodity mutual funds? Let us define first a commodity, which at best is a somewhat hazy concept in economics but has a clearer meaning when it comes to mutual funds.
Classically a commodity is anything that is harvested or mined from the Earth or its Oceans. All metals are commodities, such as gold, silver, platinum, palladium and copper among others. But crops that are harvested like coffee, cotton, and wheat are commodities too. Furthermore, petroleum and salt extracted from the depths of the seas are commodities.
Investing In Grain
Investing in abstract instruments like top money market funds is easy, but how would an investor put money into grain if he or she feels that there are good growth prospects? Or perhaps the investor feels that grain prices provides a hedge against a portfolio that is too heavily weighted into technology stocks, how can he or she take advantage of grain prices? The answer is certainly not to go out and buy a lot of grain, because that raises many more problems such as transport and storage.
Almost all traders, including long term investors who buy into commodites, buy something known as futures contracts. These are contracts that give the bearer (the one who owns the contract) the right, although not the obligation, to purchase commodities at fixed prices at some future date. For example, an example future contract for cattle might allow the bearer to purchase 100 head of a particular species of cattle for $3000 per head 3 months from now. Imagine if the price of cattle reaches $4000 per head. The bearer can go ahead and buy the cattle and sell for an immediate profit. The bearer may also sell the contract directly, but at a price close to $1000 x 100 because this is the expected profit from immediate use of the contract. Usually traders do not expect delivery of cattle and would sell it or let it expire by the due date.
Making Into A Mutual Fund
The drive to packaging stocks into groups of stocks extended to commodities also. Commodity mutual funds are aggregates of many types of futures. A famous one is the Goldman Sachs Commodity Index which invests in futures contracts across the spectrum of possibilities including energy products, industrial metals, agricultural products, livestock products and precious metals. More focused indices restrict themselves to futures of one class, such as the different types of precious metals.
A moments effort to compare mutual funds leads us to interesting conclusions. Unlike investments into large cap mutual funds that depend on strong growth of companies that are at the leading edge of economic development, investments into commodity mutual funds relies upon the steady, slow growth more mundane products like raw minerals and livestock. There is of course some correlation between the two as the more developed companies draw upon the resources offered by the commodity firms, and general economic climate has an impact on the performance of both futures and stock markets. Reducing correlations is an important lesson in how to invest mutual funds and to reduce exposure and risk.
Example Of Commodity Mutual Funds
Some examples of indices are the Dow Jones AIG Commodities Index, the Standard & Poor’s Commodity Index, the Oppenheimer Real Asset Fund, the Rogers International Commodity Index, and the PIMCO Commodity Real Return Strategy.