Posted on 22 September 2011.
Commodity exchange traded funds, or ETFs, are comprised of futures. These futures contracts represent the performance of the commodity. Commodity exchange traded funds are useful for hedging risk and getting involved in the physical goods market.
As previously stated, the contracts in an ETF are representative of the value of the commodity. Investors do not trade the commodity itself, however. For example, if you purchase corn ETF, you are not buying actual corn. You are buying a collection of assets, which are backed by the physical commodity. This may sound confusing, and it does take time, research, and practice to get the knack of commodity exchange traded funds.
A good reason to buy a commodity exchange traded funds is if you have a hunch that some new discovery or innovation will spark a price jump. You might also hear of a drought or other natural phenomenon affecting crop supplies. These would be good opportunities to purchase some commodity exchange traded funds. You might be tempted to sell your oil ETFs if a major oil-producing nation is experiencing turmoil. Another reason to sell might be an oversupply of a crop, such as corn, due to an overestimation of demand. There are a multitude of reasons to buy and sell your ETFs. As you learn how to trade in this market, you will make mistakes. Eventually, you will develop a strategy that works for you.
Learning to trade ETFs is an intimidating prospect for many investors who have grown comfortable with basic stock trading. With some effort and practice, however, you will learn to navigate this market, as well. Expanding your portfolio to include these commodities is a good idea. You can diversify your investments and hedge risks by investing in commodity exchange traded funds.
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