A commodity exchange traded fund, or exchange traded commodity (ETC) is a fund that invests in commodities or futures. They can either be diversified throughout the entire commodities market, or focus on one specific commodity (Gold, for example).
Commodities themselves are broken into segments, eg Agriculture, Precious Metals, Industrial Metals, and from there they are broken down into more specific components, eg Grain, Gold, and Aluminum respectively (neither of those are complete lists, obviously). Commodities exchange traded funds are funds that base their trading strategies on one or more of these commodities, or their respective Futures.
If you’re looking to invest in the commodities market, then it’s important to differentiate between the type of fund that (usually) owns, and who’s price is based on, the underlying commodity and those that are funds based on Futures trading. The former is a way to capitalize on movements you think are going to be made in the commodities market. For example, if your research has lead you to believe the price of oil will increase significantly over the next year, you will want to invest in a fund that has a direct correlation with the price of oil. On the other hand, funds that are merely based on futures trading puts that same sort of confidence in someone else’s research. Depending on which area a futures trading fund focuses on, their traders are trying to make the best of fluctuations in the market. This may seem like a rather small difference, but it really boils down to how much control you want to give to someone else. If you feel like you, as an individual, has a better chance of predicting market moves, go with the funds that are based directly on the commodities. If you’re just learning how to get started trading and investing, then you might want to turn that control over to experienced traders and investors, while still keeping your hand in the commodity market. This is when you’d go with a fund that is based upon the trading of futures, rather than the price of any commodity or sector. The performance of these funds can vary widely from any corresponding commodity, so bear that in mind.
Some of the more well-known exchange traded commodity funds include U.S. Natural Gas (UNG), U.S. Oil (USO), SPDR Gold Shares (GLD) and iShares Silver Trust (SLV). This isn’t a recommendation to buy or sell any of these funds, nor it is even an assessment of whether or not they are seful trading vehicles, they are just, in our experienced, some of the more talked about exchange traded commodities (ETC) on the market.
Overall, from a trader’s perspective, a commodity exchange traded fund makes just a good trading vehicle as any other on the market, as long as there is reason for the market to move the price. If you’re looking to invest in the commodities market, ETFs are, again, as good a choice as any as a place to get started. Depending on how much research you plan to do yourself, you will have to either choose a fund based on commodity prices, or one based on Futures trading; that choice is entirely up to you though.
Disclosure: The author of this article does hold a position in any of the stocks of funds mentioned in this article at the time of its writing.