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Learn About Commodity Index Funds

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Commodity Index Funds

What Are Commodity Index Funds?

Commodity index funds are like any other index fund but they are tied to specific types of commodities. The index itself is simply a list of investments in which the fund has invested some of its clients’ pooled resources. When you buy shares of the fund, you do not actually purchase a single commodity. Instead, you buy a portion of the commodity index funds total exposure to the variety of commodities on that list.

There are a number of financial instruments that may compose such commodity index funds. A single fund can contain many different types of such instruments. Besides quantities of the commodities themselves, examples include futures contracts, options based on those contracts, and stocks in companies that deal in commodities. Commodity index funds are usually focused on a particular type of commodity, though their exposure to various methods of investment in them minimizes the danger of focusing investment in one item or business.

There are many popular commodity index funds around now. Examples include the Pimco Real Return Strategy Fund, the Oppenheimer Fund, Barclays and JP Morgan.

Controversies About Commodity Index Funds

Most commodities are things that are virtually essential for life or for the sustaining of economies. Therefore, these index funds have come under some public examinations because they have a direct impact on the supply and demand of things such as food and energy. In 2010, a new article suggested that these funds had been negatively impacting food prices through speculation. In 2008, food riots had occurred in 30 countries. Global prices had surged 80% in just three years. However, the evidence tying commodity index funds to these events is not very substantial.

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