Commodity ETF, Commodity Exchange Traded Fund
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An exchange traded fund that invests in commodities, such as precious metals or agricultural products, is called a commodity ETF. Among of the first commodities to be invested in were gold and crude oil. Although commodity exchange traded funds are index funds, they track non-securities indices.
Since commodity exchange traded funds do not invest in securities, they are not subject to the regulations applicable to “investment companies†as specified under the 1940 Investment Company Act in the United States. However, the public offerings of commodity ETFs are subject to reviews by the Securities and Exchange Commission (SEC).
StreetTRACKS Gold Trust (GLD), launched in November 2004, was the first commodity ETF to be traded in the American markets. The GLD was designed such that investors were not required to store actual gold bars in their physical forms. At the same time, it gave investors exposure to the spot prices of gold. However, it was the Australian Stock Exchange that first launch a gold commodity ETF.
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How is a Commodity ETF Traded?
Commodity ETFs, just like the stocks, are traded on an exchange. There is a brokerage commission on each transaction. Commodity exchange traded funds are tax efficient. Therefore, these are more attractive investment options than mutual funds.
Investors can apply the same trading strategies that they use for stock trading. They can sell short, buy on margin, use a stop order or a limit order, and invest the desired amount of money. Many commodity ETFs also give the facility of put and call options.
Benefits of Commodity ETF
The benefits of commodity ETFs are:
- There is no minimum investment requirement in a commodity ETF.
- Investors can make profits from movements in a variety of commodities.
Risks of Commodity ETF
The disadvantages of commodity ETFs are:
- A commodity ETF is prone to short term speculation.
- It is dependant on the efficiency mechanism of brokerages.
The transparency of commodity ETFs vary, depending on the actual commodity that is tracked. Since these ETFs mirror the actual price of the commodity, it is easy to derive the prices of some of the exchange traded funds.
