What is the best way to invest in commodities?

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ramram22
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What is the best way to invest in commodities?

Post by ramram22 »

Let’s say you believe we are going through a period similar to the one from 1966 to 1982, when returns from the stock market were very poor. And let’s say instead you wanted to invest (at least some money) in commodities. What would be the best way to do this?

I understand this approach involves elements of what might be considered market timing and possibly price speculation (in that commodities do not generate cash flows) and that this therefore deviates from the pure Bogleheads philosophy. So I’m not looking for an explanation as to why you think buy-and-hold-VOO investing is a better approach.

I am simply asking, if someone wanted to invest some money in commodities, what would be the best way to do this? Are there certain ETFs that give you what would be considered broad-based exposure? Would you buy gold, agricultural commodities, etc.? Thanks in advance for any thoughts.
Phyneas
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Re: What is the best way to invest in commodities?

Post by Phyneas »

ramram22 wrote: Sun Jul 03, 2022 2:38 am Let’s say you believe we are going through a period similar to the one from 1966 to 1982, when returns from the stock market were very poor. And let’s say instead you wanted to invest (at least some money) in commodities. What would be the best way to do this?

I understand this approach involves elements of what might be considered market timing and possibly price speculation (in that commodities do not generate cash flows) and that this therefore deviates from the pure Bogleheads philosophy. So I’m not looking for an explanation as to why you think buy-and-hold-VOO investing is a better approach.

I am simply asking, if someone wanted to invest some money in commodities, what would be the best way to do this? Are there certain ETFs that give you what would be considered broad-based exposure? Would you buy gold, agricultural commodities, etc.? Thanks in advance for any thoughts.
There are a lot of ETFs that allow you to invest in commodities. Their MERs range from around 0.25 to north of 0.75 I think. You can find a list of them here. They employ different strategies, have different liquidities, and weight their baskets differently, so take a look at their homepages to see their holdings and find something that you like.

Gold and 'broad market' commodities often behave differently from each other, with broad market commodities responding quickly and sharply to inflaton/expectations, while gold responds more to dollar strength and real rates, amongst other things. There are a number of good threads in here about the ins and outs of commodity investing, and I'd suggest reading them first, even if you're convinced to buy commodities, there is a lot of good information.
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TopherM1
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Re: What is the best way to invest in commodities?

Post by TopherM1 »

Note that you've sorta missed the boat on commodities in the short term, and they are very near a cycle peak, likely trending downward. Commodities were out of this world during the pandemic, but commodity values will tend to be inverse to interest rates, so they are slowly but surely inverting as the Fed increases interest rates. Still a good long term play, but you're likely going to see the commodities market as a whole trending downward as long as the Fed continued increasing interest rates. I'd consider investing in something else in the short term with an eye on buying into commodities once the Fed stops raising interest rates, which is what I'm personally doing (though admittedly goes against the Boglehead code :)

If you do want to invest, some funds that I have owned at times that have been great for me include the following. Note these are also pretty high yield dividend funds. Don't freak out when they pay out their dividends in mid to late December and the fund price drops in relative proportion with the dividend yield. That's a feature, not a bug, they pay the dividends out of the Net Asset Value of the fund!

CCRV
BCI
BCD
COMT
COMB

Good luck!
gougou
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Re: What is the best way to invest in commodities?

Post by gougou »

For commodities that don’t degrade and cheap to store such as precious metals, you could buy gold and silver directly or invest in an ETF that hold them.

For commodities that are perishable or expensive to store, you could invest in commodity producers such as oil & gas companies, mining companies, timberland companies, farming/food companies, etc.

Then there are REIT, pipeline, railway, port companies that tend to go up with commodity prices because these assets cost a lot of commodities and labor to create, and they earn inflation-linked profits.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
QBoy
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Re: What is the best way to invest in commodities?

Post by QBoy »

There are etfs that hold commodity futures. Examples are GSG and DBC.

Here is an academic study about their role in a portfolio:

https://www.tandfonline.com/doi/abs/10. ... 62.n2.4083
MarkRoulo
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Re: What is the best way to invest in commodities?

Post by MarkRoulo »

ramram22 wrote: Sun Jul 03, 2022 2:38 am Let’s say you believe we are going through a period similar to the one from 1966 to 1982, when returns from the stock market were very poor. And let’s say instead you wanted to invest (at least some money) in commodities. What would be the best way to do this?

I understand this approach involves elements of what might be considered market timing and possibly price speculation (in that commodities do not generate cash flows) and that this therefore deviates from the pure Bogleheads philosophy. So I’m not looking for an explanation as to why you think buy-and-hold-VOO investing is a better approach.

I am simply asking, if someone wanted to invest some money in commodities, what would be the best way to do this? Are there certain ETFs that give you what would be considered broad-based exposure? Would you buy gold, agricultural commodities, etc.? Thanks in advance for any thoughts.
One thing to understand is that commodities (futures) will be in either contango (futures price is higher than current/spot price) or backwardization (current price is higher than future price).

With backwardization you can purchase a future and if nothing changes then it will become more valuable as it converges on the spot price. This is a "roll yield" (and you can get it with bonds unless the yield curve is inverted ...).

In the 1970s the roll yield was positive. In the 1990s and early 200s the roll yield was negative so the 1970s strategy of buying futures would cost you money.

The common story for this is that futures act a lot as insurance for suppliers and consumers. In the 1970s there were a lot more folks who wanted to lock in the SELLING price so the curve was in backwardization. By purchasing a future you were essentially selling insurance to the commodity suppliers and they wanted insurance so there was profit to be made.

By the 1980s academia had notices this (and Link-Waldock was trying to become the Schwab of futures ...) and folks poured into commodities. With lots more people wanting to purchase futures the backwardization weakened and eventually became contango. And, maybe related, commodities stopped offering "uncorrelated stock-like returns."

So, you can probably invest in commodities by purchasing an ETF that goes long the futures in some index (such as the GSCI) but unless the futures curve is in backwardization as it was in the 1970s you may get the strategy but not the returns.

You can purchase the raw commodities, of course. This works best with gold and silver and not as well with copper and oil :-)

But the 1970s saw the US lift the legal prohibition of Americans from owning gold at roughly the same time that inflation took off. I don't expect the same environment going forward, partially because Americans can already own gold ...

So, again, you can follow a strategy that worked in the 1970s (buy gold!) but the environment is different enough that the returns may be quite different.

To answer you question, though:
  • GSG is an ETF that tracks the Goldman Sachs Commodity Index
  • GLD and SLV are ETFs that track the spot price of Gold and Silver
  • You can also purchase gold and silver (and platinum and palladium!) from places such as Apmex.com
JBTX
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Re: What is the best way to invest in commodities?

Post by JBTX »

Generally the best time to buy commodities is right after I sell them.
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nedsaid
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Re: What is the best way to invest in commodities?

Post by nedsaid »

JBTX wrote: Sun Jul 03, 2022 3:03 pm Generally the best time to buy commodities is right after I sell them.
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nisiprius
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Re: What is the best way to invest in commodities?

Post by nisiprius »

ramram22, just something very basic which I hope you already know.

You seem to be talking about investing in commodities.

Most of the answers you are getting are about investing in commodity futures.

The behavior isn't the same, so don't base your decisions on the behavior of "commodities."

Commodity futures are easy to invest in, because there are many mutual funds and ETFs that invest in them; that's because commodity futures are "securities."

Commodities, aka "spot commodities," are hard to invest in. Only a handful of brokerage investments actually represent commodities--I think they are all precious metals ETPs.

That doesn't mean commodity futures funds and ETFs are bad, just that they are different from investing in commodities. A good illustration of the difference occurred in 2009. Oil went up, but an oil "commodity" ETF went down.
Like so many investors in the spring of 2009, Gordon Wolf needed to dig out of a hole. A 68-year-old psychologist in Napa, Calif., Wolf was a buy-and-hold sort of guy, yet the nest egg he had entrusted to his broker at Merrill Lynch (MER) was suddenly down by more than 50 percent.

...The commodity ETFs were supposed to offer a hedge against equity losses, but in the crash of 2008 everything fell in tandem. Now it was early 2009, and Wolf was watching oil fall to $34 a barrel. That had to be an opportunity, he figured, so he called his Merrill broker and asked about the U.S. Oil Fund (USO), an ETF designed to track the price of light, sweet crude. "This seems to be something good," Wolf told the broker, and had him buy about $10,000 of USO.

What happened next didn't make sense. Wolf watched oil go up as predicted, yet USO kept going down. In February 2009, for example, crude rose 7.4 percent while USO fell by 7.4 percent.
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