Is investing in commodity futures possible right now? Well, it should be remembered at the beginning that raw materials are one of the financial assets of the most relevant futures and that today they are traded because they were born from the need of producers to protect the price of their crops against any unforeseen event.
Go ahead that the operation in raw materials is more complex than the rest of the operation because to the normal conditions of any market is added that it is something tangible and therefore subject to strong seasonality derived from weather factors.
In addition, futures are deliverable, this means that when you buy or sell a futures contract, you acquire the obligation to buy or sell a certain amount of that raw material in a specific place and on specific dates, so in these markets we can find mixed speculators with product buyers and producers who use futures as protection.
Invest in the real asset
The most direct method of investing in commodities would be the purchase of the commodity itself. Obviously this method only works with certain commodities, such as precious metals, but it is nonetheless a way to gain exposure in these markets.
If you wanted to invest in gold, for example, you could buy a gold bar. It is a quantity of refined gold that meets the standard conditions of manufacture, labeling and registration.
However, there are many problems with this form of investment. You have the immediate problem of having to store the asset. This type of investment is also relatively less liquid than others, so it is later more expensive to exchange. Similarly, since a gold bar is not divisible, its liquidity increases.
Investing in an exchange-traded fund
On the other hand, many people who invest in commodities do so by investing in commodity-based exchange-traded funds (ETFs). An ETF is a fund that is traded on a stock exchange. An ETF can be made up of many different asset classes of stocks, commodities, or bonds.
Some ETFs aim to track the price of the underlying commodity itself, such as physical gold ETFs. On the other hand, some will try to track a commodity through the composition of an ETF that may have shares of companies that extract or exploit that commodity. The latter type of ETF can be known to have a more divergent price than the underlying commodity.
Investing in a futures contract
Commodity futures are agreements to buy or sell a specified quantity of a commodity at a specified price and on a specified date in the future. A trader makes money if the commodity appreciates or depreciates relative to the fixed price, depending on whether he takes a long or short position respectively.
Futures are a derivative product, so you do not own the commodity itself. Buyers can use futures to hedge against the risks associated with price fluctuations (especially in the more volatile soft commodity markets), and sellers can use futures to "lock in" profits on their products.
Investing in CFDs on Basics
Investors can trade CFDs on commodities as a means of gaining exposure in the commodity markets. A contract for difference (CFD) is a derivative product, in which there is an agreement (usually between a broker and an investor) to pay the difference in price of an underlying asset between the beginning and the end of that contract. You trade CFDs on margin, which means you only have to put in a fraction of the value of your trade. Leveraged trading allows traders to gain more exposure with a smaller initial deposit.
Investing in commodities trading CFDs brings many advantages. CFDs are exempt from stamp duty, since it is a derivative product, so you would have less costs when trading CFDs.
Invest in commodities
There are several ways to consider investing in commodities. One is to buy varying amounts of physical raw materials, such as precious metal bullion. Investors can also invest by using futures or exchange-traded commodity (PTE) contracts that directly track a specific commodity index. These are highly volatile and complex investments that are generally recommended only to sophisticated investors.
Another way to get exposure to commodities is through mutual funds that invest in commodity-related companies. For example, an oil and gas fund would own shares issued by companies engaged in the exploration, refining, storage and distribution of energy.
Commodity stocks
Do commodity stocks and commodities always offer the same returns? Not necessarily. There are times when one investment outperforms the other, so maintaining an allocation to each group could help contribute to the overall long-term performance of a portfolio.
Advantages of investing in commodities
First is their diversification. Over time, commodities and commodity stocks tend to provide returns that differ from other stocks and bonds. A portfolio with assets that are not moving at the same rate can help you better manage market volatility. However, diversification does not ensure a profit or a guarantee against loss.
Potential returns
The prices of various commodities can fluctuate due to factors such as supply and demand, exchange rates, inflation, and the general health of the economy. In recent years, increased demand due to huge global infrastructure projects has heavily influenced commodity prices. In general, the increase in commodity prices has had a positive impact on the stocks of companies in related industries.
Possible hedge against inflation
Inflation - which can erode the value of stocks and bonds - can often mean higher commodity prices. While commodities have performed well in periods of high inflation, investors should be aware that commodities can be much more volatile than other types of investments.
Risks of investing in basic
Main risk. Commodity prices can be extremely volatile and the commodity industry can be significantly affected by world events, import controls, global competition, government regulations, and economic conditions, all of which can impact on commodity prices. There is a possibility that your investment will lose value.
Volatility
Mutual funds or equity products that track a single sector or commodity can exhibit above-average volatility. Additionally, commodity funds or PTEs that use futures, options, or other derivative instruments can further increase volatility.
Exposure of foreign and emerging markets
In addition to the risks associated with investing in commodities, these funds also carry the risks that accompany investing in foreign and emerging markets, including volatility caused by political, economic and monetary instability.
Asset concentration
While commodity funds can play a role in a diversification strategy, the funds themselves are viewed as not diversified as they invest a significant portion of their assets in fewer individual stocks than are generally available. concentrated in 1 or 2 industries. Consequently, changes in the market value of a single investment could cause greater fluctuations in the share price than would occur in a more diversified fund.
Other risks
Commodity-focused equity funds can use futures contracts to track an underlying commodity or commodity index. Trading in these types of securities is speculative and can be highly volatile, which can cause a fund's performance to differ significantly from the performance of the underlying commodity. This difference can be positive or negative, depending on market conditions and the investment strategy of the fund.
Excellent diversification instrument
It is difficult to invest in commodities using the ever popular Ucits framework. David Stevenson finds out how investors can access this asset class and if there is an appetite for them. As far as Martin Estlander is concerned, commodities are an 'excellent diversification tool'. So why, the founder of the Finnish company Estlander & Partners (E&P) wants to know, retail investors who want to access this asset class face so many obstacles?
Although retail investors can invest in commodities, Estlander - whose company launched the E&P Commodity Fund in January - refers to Europe's stringent diversification rules on Ucits funds that are a limiting factor for commodity investing. Estlander structured the E&P Commodity Fund under the Alternative Investment Fund Managers Directive (AIFMD), though he notes that it offers the same investor protection that the Ucits brand is famous for.
One of the main drawbacks to using AIFMD-regulated funds to invest in commodities is that the regulation reduces the number of investors who can invest. Isabelle Bourcier, head of business development at Ossiam, a provider of exchange-traded funds (ETFs), says this is why it was imperative for Ossiam's commodity funds to comply with Ucits regulations: “When we decided to expand our range of products to commodities and we spoke with some index providers, one of the conditions we asked them was to ensure that the index met Ucits diversification standards so that we could maintain full compliance with Ucits regulations. Ucits ». For an ETF to be listed on an exchange, the Ucits tag is essential, ”he says.
Structured commodity funds
Commodity funds structured under the AIFMD can go across Europe in the same way as a Ucits fund, although there are significant differences. Unlike a Ucits fund, there is no need for a daily liquidity report, although the E&P Commodity Fund does provide it weekly, in addition to providing information on estimated prices. But, why at the moment these operations can be carried out in these very special financial assets?
Regardless of constraints for investors to enter the space, or for ranges of strategies once in it, is now a good time to invest in commodities anyway? Lately, commodity prices - particularly the price of oil - have fallen. “In general, we think it is a good time to look at commodities.
Different sectors work very differently, ”says Bernhard Wenger, head of European distribution at ETF Securities. As the long commodity supercycle appears to be over, opportunities to invest in commodities now carry additional risk, but also greater reward potential. Companies are studying the differences between spot commodity prices and futures prices - factors referred to in futures language as backwardation and contango - that are just as important as supply factors. and the demand to calculate the possible benefits.
Energy-based products
A Ucits ETF, the UBS ETF CMCI composite, includes a wide range of commodities such as energy, agriculture, and industrial metals, but is capable of mitigating 'negative balancing performance'. According to Andrew Walsh, CEO of UBS ETFs, this product attracted $ 60 million (€ 53 million) of investment in two weeks in early February, showing that there is an appetite for investing in commodities. "We are trying to find long-term trends, which is part of the equation, and we are also trying to find special situations where supply is not enough to meet demand when we see prices tighten," says Estlander. Another way to invest would be through a commodity listed on the stock exchange (ETC), with the advantage that anyone, from a private individual to a pension fund, can invest in one.
Private investor participation in commodities is something that Steve Ruffley, Intertrader's chief market strategist, has noticed. "Now you see ordinary people getting involved in oil - it used to be traded by teams of specialists 24 hours a day," he says, adding that he does not think this phenomenon will last long. One of the main advantages of using ETCs is that they are highly liquid. As Wenger explains, the typical commodity investor is not a buy-and-hold investor, but rather a tactician. The added liquidity allows investors to get in and out quickly, although it must be said that there is underlying risk in using these tools.
They don't have the investor protection assigned to other products, which means, according to Walsh, a lot of money could be lost. Right now there is a clear lack of competition in the raw materials space; investors and investment banks are exiting. Banks are under regulatory pressure to maintain capital requirements and some would argue that investment banks don't really have large commodity trading desks anyway. However, for those left in the game, it appears to be a favorable market.
Investment in precious metals
Gold is a shelter value in a crisis scenario and, while other investment options such as bonds and stocks often fail in times of stress and market instability, the yellow metal has been shown to improve investment results, both in times of stability and of financial instability in recent years.
You can invest in gold through bullion, in various modalities or forms, and also through coins, although for this it is essential that they have been legal tender in the country of origin and that they are sold at a price that does not exceed 80 % the value of gold on the free market.
You can buy different products of these characteristics, from gold bars of 2 to 1.000 grams, which can have an outlay of between 100 and 21.000 euros; to precious metal coins, among which the "Kruger Rand" or the "Maple Leaf" stand out, and which can be purchased from 150 euros.