Commodities have been a huge talking point in the market for a while now, and even more so in recent days given the big time volatility. That being the case, it probably comes as no surprise that I received the following question.
Hello John,
What is your opinion or take on Commodity ETF’s. Is it something I should look into, If yes where would be a good place to start?
I’m half way through your course and enjoying it.Â
Regards CharlesÂ
If you are looking for a place where you can play volatility and day or otherwise short-term trade an active market, then commodities are definitely worth a look. The big movements and high volume are providing loads of great opportunities.
For someone new to the markets looking to play commodities, the ETFs are probably a better starting point than the futures market, which used to be the only real way to play commodities (you still hear people refer to the futures market as the commodities market sometimes). They aren’t leveraged like futures, so the risks are much reduced. You’re not at risk of losing your whole account in ETFs as is possible in futures (a look at the lock limit trading in Cotton recently demonstrates exactly how that can happen).
Here’s the problem, though. Many of the ETFs out there are grouped, where there are even ones that cover the market you’re interested in. For example, you could have an ETF that covers soft commodities, for example. Yes, there are ETFs specific to gold and oil, but they are fairly unique, at least in terms of readily available and active options.
Of course you could also look at ETFs on companies involved with the commodities of your interest. Gold miners and steel companies are examples of groups with active ETFs. And naturally there are the stocks themselves directly. The risk there, though, is that the companies don’t perform as well as the commodity because they introduce the element of earnings and whatnot.
As you can see, there are loads of alternatives. It all comes down to how you feel most comfortable approaching the market.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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