Investing in a Commodity Fund
A commodity fund invests in commodities directly or in companies that extract and refine commodities. Commodity funds can be either passively or actively managed. Actively managed funds invest in commodities or commodity-related companies, while passively managed funds follow a commodity index. Including a commodity fund in your investment portfolio have many benefits.
To give an introduction to what alternatives you have as an investor and how it works to invest in commodities, the following questions will be answered:
- What is a commodity?
- Why invest in commodities?
- How to invest in commodities?
What is a commodity?
A commodity is a raw material or an asset extracted directly from nature, such as wood, oil, coffee beans and metals. Commodities are often used as input material to produce goods and services.
Different types of commodities
- Soft commodities (softs) include raw materials grown, such as coffee, cocoa, sugar, corn, wheat, and soybeans.
- Hard commodities are extracted by digging in the ground, such as gold, silver, copper, and lithium.
- Energy raw materials are directly related to energy, including electricity, gas, coal, and oil.
Why invest in commodities?
Investing in commodities provides portfolio diversification as this asset class has a low correlation with the broad stock market. Investing in commodities brings the following benefits to an investment portfolio:
- Risk-adjusted return: An investment portfolio with several uncorrelated assets typically offers a higher risk-adjusted return.
- Protection against inflation: Investing in commodities can also be good protection against inflation as you can historically see that commodity prices increase during periods of high inflation.
How to invest in commodities?
There are different ways to invest in commodities. You can invest in futures contracts, commodity stocks, exchange-traded funds, daily traded funds, or directly in the physical commodity.
A popular way to invest in commodities is to invest in a commodity fund. There are different types of funds, actively managed funds and passively managed funds. When investing in an actively managed commodity fund, you get a portfolio of different assets exposed to the commodity sector, such as commodity stocks or exchange-traded commodities (ETCs). A benefit with this type of fund is that a portfolio manager is responsible for overlooking the fund, picking the best commodity stocks, etc. The investor hence avoids the work of keeping track of the commodity market. This is advantageous if you want to include commodities in your investment portfolio effectively. Before investing, investing in funds entails a management fee, so you should always read the fund fact sheet.
In the commodity funds category, you can choose between daily traded funds and exchange-traded funds (ETFs). The difference between these is that daily traded funds are actively managed and traded once a day, while exchange-traded funds are regulated and can be bought and sold during the exchange’s opening hours, just like a share. For a specific investor, what defines the best commodity fund depends, among other things, on risk appetite and the desired liquidity in the fund; exchange-traded funds offer the cheapest and, for many, the most effective exposure.
Learn more about investing in commodities here:
Why invest in commodities with AuAg Funds?
AuAg Fonder invests in commodities, mainly precious metals and green tech elements. Investing in AuAg’s Funds has the following benefits:
- Managed exposure towards two megatrends: Commodities, such as precious metals and green tech metals, offer protection against monetary inflation and are necessary in the transformation to a green world - trends that are highly topical today. AuAg Funds are experts in creating and managing funds within this area.
- Improved returns to any portfolio: AuAg’s funds fit well into a portfolio of traditional assets as they have a low correlation with equities in particular. This makes AuAg’s Funds a great addition to a portfolio consisting of, for example, technology- and real estate stocks.
- Focus on sustainability: AuAg manages the equity funds AuAg Silver Bullet and AuAg Precious Green and the exchange-traded fund AuAg Gold Mining ETF. All funds are classified as Article 8 funds (SFDR), which means that AuAg Funds promote change in the fund holding to enable the transition to a sustainable future. The fund AuAg Precious Green invests in precious metals (with a focus on gold) and companies in green technology that build the products that create a green future (batteries, solar cells, fuel cells, etc.). The ETF AuAg ESG Gold Mining UCITS ETF (ESGO) offers exposure to an equilibrium basket of 25 ESG-screened companies active in the gold mining industry. The ETF follows the Solactive AuAg ESG Gold Mining Index, which focuses on companies with a low ESG risk rating.