What do you mean I already have commodity exposure in my portfolio?

Most people do not realize that they may already have commodity exposure in their portfolios indirectly through their mutual fund holdings (and if they are invested in company(ies) that produce or use commodities).

People think in direct terms. For example: Which group of people faired better during the Gold Rush days? The gold miners? Or the businesses selling them their picks and shovels? The latter group was more profitable and many towns sprang up that are still here today, even through the gold miners are long gone.

Investing in broadly designed and defined indexed mutual funds tends to ensure you have commodity exposure. This is also true if you hold international indexed mutual funds.

Thus, you need to consider your indirect exposures when you invest as well in order to properly evaluate if something is, or is not, in your portfolio. Having an indexed exposure is probably a more sound approach so that you do not inadvertantly over, or under, expose yourself to any single risk over time.

Futures are another method to participate in the commodities markets.. In the past, investors in futures were benefiting from the return to the investor from rolling when the spot price is greater than the future price. This condition, where the spot price is greater than the futures price, is known as “backwardation.” The opposite, where the futures price is greater than the spot price, is called “contango.”

Commodity indexes, a popular and useful concept for stock of companies, are an ineffective concept for commodities. Commodity indexes are constructed based on either production of the underlying commodity or on the trading volume of the commodity future. These commodity indexes should not be confused with indexes of company stock which I discussed above.

For more on commodities exposure, please read this article by Matt Carvalho:

 

About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

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