Commodity ETFs: The Easiest Way To Capture The Commodity Bull…

| April 3, 2013 | 0 Comments

bullishLet’s pick up right where we left off a few days ago.  As you know, on Monday I opined why commodities are an essential addition to every investor’s portfolio. 

In case you missed it, here’s a quick recap…

Out of control money printing by the US Federal Reserve makes extremely high inflation rates a very real (if not certain) possibility in the near future.  With billions of dollars being plowed into the US economy via quantitative easing (QE) each month, the Fed is performing one of the largest monetary experiments of modern times.

Of course, I can’t say I blame Ben Bernanke and the Federal Reserve…

The US financial crisis of 2008/09 was severe.  An imploding housing market and a deeply wounded banking sector had the US economy stuck in a deflationary spiral. 

But now, after two full rounds of QE, another partial round (Operation Twist), and a third round that’s still in progress, the US economy is making a comeback.   The housing market is healing, stocks are roaring, and unemployment rates are slowly falling.

However, we’re not out of the woods yet…

At some point, the Fed will have to end their monetary malarkey.  And that’s when many financial experts agree that the “you-know-what” will hit the fan. 

What’s the worst that could happen?

The most likely outcome is a deadly drubbing of the US Dollar.  All the money that’s been printed in recent years will make its way into the actual economy.  The end result will be the classic definition of inflation- too much money chasing too few goods.

In this inflationary environment, investors will stampede into things that are real and tangible- like commodities.

So what’s the best way to add hard assets to your portfolio?

You have some options…

First of all, you could always go the traditional route of opening a futures account.  However, futures are a little mysterious since you have to learn a whole new investing language… spot prices, roll yield, collateral interest, contango, backwardation, etc. 

See what I mean?

If you’re investing in futures contracts, you’d better know exactly what each of those terms mean.  They’ll affect your investment returns in a big way.

I don’t know about you, but I prefer the much simpler alternative to complicated futures.

… Commodity ETFs.

In a nutshell, commodity ETFs are stocks created to track a specific commodity or index.  For example, the iShares Silver Trust (SLV) tracks, you guessed it- the price of silver. 

How does it work?

Well, SLV is rather unique as the fund actually holds the physical metal in its vaults.  In fact, as of March 28th, 2013, there were 10,703 tonnes, or 344 million ounces, of silver held in the trust.  Buying shares of SLV entitle you to a percentage ownership of that silver.   Of course, buying the ETF also exposes you to the ups (and downs) of the silver market.

Now let me be clear…

Not all commodity ETFs are like SLV.  Many track commodity prices via exposure to futures contracts- and that’s a whole different ballgame.

We’ll cover those in a future article… see you then!

Until Next Time,

Justin Bennett

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Category: Commodity ETFs

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.