Invest in commodities and commodity funds
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Investing in Commodities – Diversifies a traditional portfolio
Key takeaways:
- Commodities are assets extracted directly from nature.
- Commodities can provide a good yield relative to risk.
- Commodities can perform better when commodity stocks and bonds do worse.
- Commodities diversify a portfolio and can hedge against inflation.
- The share of commodities in a portfolio should be based on the investor's risk profile, time horizon, and the prevailing market climate.
Adding a commodity fund to an investment portfolio offers several advantages. This article will introduce investing in commodities, describing what a commodity fund is, what benefits there are in investing in commodities, what returns an investor can expect, and how to invest in a commodity fund. We provide everything you need to know about investing in commodities to allow you to form your own opinion.
What is a commodity fund?
Commodity funds invest in commodities or in companies that extract or refine commodities. Commodity funds are managed either passively or actively. Commodity funds invest in commodities or commodity-related companies, such as mining companies.
There are three categories of commodities that funds can invest in:
- Soft commodities (softs) include grown commodities, such as coffee, cocoa, sugar, corn, wheat, and soybeans.
- Hard commodities, such as gold, silver, copper, and lithium, are commodities extracted from the ground.
- Energy commodities, including electricity, gas, coal, and oil, are directly related to generating energy.
Why invest in a commodity fund?
Protect your portfolio
Investing in commodities can improve the risk-adjusted return to an investment portfolio. This means that commodities can generate a return in time periods when stocks and bonds decline in value.
Commodities have a low correlation to the rest of the stock market, which means that investments in commodities can yield returns when commodity stocks and bonds underperform. Commodities have historically proven to be valuable assets in a portfolio consisting of stocks and bonds. Industrial commodities such as silver and platinum tend to do well during periods of high growth, while gold and energy commodities perform better during recessions.
A simple way to gain exposure to the commodity market
Investing in commodity funds is an investor-friendly way to gain exposure to the commodity market.
A manager allocates the assets when you invest in commodities through a fund. Investing in commodity funds involves a management fee, so reading the fund fact sheet before investing is important.
Spread the risks
Investing in commodity funds allows the investor to diversify the risks in their portfolio as commodities have low correlation or co-variation with the broad stock market. Including several uncorrelated assets in your investment portfolio contributes to a higher risk-adjusted return. Investing in commodity funds can also be a good hedge against inflation, as commodity prices have historically increased during periods of high inflation.
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The difference between daily-traded and exchange-traded funds
Within the commodity funds category, you can choose between daily-traded funds or Exchange-Traded Funds (ETFs). The difference is that daily-traded funds are actively managed and traded once per day. In contrast, exchange-traded funds follow an index, are rules-based, and can be bought and sold at any time during the stock market's opening hours, similar to commodity stocks.
Which is the best commodity fund?
The best commodity fund depends mainly on the investor's risk appetite and time horizon. Exchange-traded funds are often cheaper than daily-traded funds. However, a daily-traded fund has a greater opportunity to outperform since it is actively managed. However, the best commodity fund is not necessarily the one with the lowest fee. It is instead important to understand the risk profile and expected return of the fund.
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 of 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.
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Why invest in commodities with AuAg Funds?
AuAg Funds offers commodity funds that focus on providing exposure to precious metals and elements within green technology. These assets offer protection against monetary inflation and are necessary to transition to a green world – highly topical trends today. AuAg's funds fit well into a portfolio of traditional assets as they have a low long-term correlation with stocks and bonds.
Is it possible to invest in commodities such as precious metals sustainably? We need the metals and the mining companies play a central role in the world's transition to a more sustainable future. AuAg fosters the green transition by investing in carefully selected companies that are part of the solution. Investing commodities via AuAg Funds rewards the most sustainable companies, ultimately contributing to a cleaner industry.
About AuAg's funds
AuAg Funds offers funds that invest in companies that extract commodities ー choose the commodity fund that suits your investment strategy.
Funds containing companies that extract commodities:
AuAg Silver Bullet
Invest in silver via our daily-traded fund with the tagline “Europe's riskiest fund ー with high volatility comes great potential for returns," which includes 25-30 focused silver mining companies. By the fund's overall strategy, at least 90% is invested in transferable securities and fund units whose performance is affected by the market development for silver and gold.
Silver is the world's second most used commodity (after oil) regarding the number of use cases. The metal is in high demand because of its properties, making it indispensable in the industry and our transition to a greener world.
AuAg Gold Mining
Invest in gold via our fund AuAg Gold Mining, which offers exposure to an equally weighted group of 25 ESG-screened companies active in the gold mining industry. The fund tracks the Solactive AuAg ESG Gold Mining Index, focusing on companies with low ESG risk score.
Investing in gold mining companies gives a leverage effect against the gold price and, thus, a more significant upside in a bull market. Gold is used, among other things, by many countries' central banks to secure and stabilize their respective currencies. Gold is also an essential component of a well-diversified investment portfolio and is used in almost all hi-tech (for example, computers and mobile phones) and to make jewellery.
AuAg Essential Metals
A portfolio of 25 diversified metals mining companies focusing on industrial and technology metals, such as copper, lithium, steel, uranium, cobalt, nickel, etc. Learn more about the fund.
Funds containing companies that extract commodities and invest in physical commodities:
AuAg Precious Green
Invest in copper, lithium, and other metals through our daily-traded fund AuAg Precious Green, which provides exposure to companies that extract metals that are important for the green transition, companies that develop green technology, and physical precious metals (primarily gold). Investing in green tech companies and commodities, the total risk in the portfolio becomes lower and allows investors to be part of the green transition.
Combining mining companies and physical commodities have proven to provide effective portfolio protection, for example, in the spring of 2022 when both stocks and bonds fell simultaneously, an otherwise unusual scenario.
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Where to invest AuAg’s funds?
AuAg’s daily-traded funds are available in Sweden, Norway, Denmark, Finland, and Germany. You can invest in commodities by buying these funds via fund platforms such as Avanza, Nordnet, SAVR, and Fondo.
Our ETF is available in the entirety of Europe and is listed on the following exchange platforms: Borsa Italiana, Deutsche Boerse Xetra, Euronext Paris, London Stock Exchange, and SIX Swiss Exchange.
You can find direct links to the platforms where the funds are available from each fund page.
What yield can be expected from commodities?
Commodities can be volatile, and high volatility, therefore, means a large upside and downside. High volatility in a rising market can generate high returns, and vice versa. The return distribution of commodities shows a positively skewed distribution, indicating a tendency for commodities to perform extremely well at certain times. Returns on commodities are strongest when inflation unexpectedly rises ー which usually coincides with falling stocks and bonds.
Investing in commodities protects the portfolio against inflation and provides a higher risk-adjusted return.
How much of a portfolio should I allocate toward commodities?
To ensure a diversified portfolio, experts usually recommend that around 4-15 % of the portfolio consist of gold. Investors with a lower risk tolerance may need to allocate a lower percentage of their portfolio to invest in commodities.
How much precious metals a portfolio should contain depends on the investment strategy and market scenario. According to Oxford Economics, a portfolio containing 5% gold is optimal in a 50-year market scenario with 2.25% annual growth and 2% inflation. If inflation is higher, the percentage of gold should also increase.
The share of commodities in a portfolio is determined by the investor's risk profile, time horizon, and prevailing market climate.
At a time when, for example, both shares and bonds have low return potential, it can be interesting to increase one's commodity exposure and vice versa. Several successful investors and portfolio models advocate that up to 40 % of a portfolio's exposure should be allocated to commodities, e.g., Ray Dalio's all-weather portfolio and the dragon portfolio.
Do thorough research to find the best commodity fund for your investment strategy, and remember that historical returns are no guarantee of future returns.
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