Commodities exchange traded funds or commodities ETFs are a type of exchange traded funds which invests in commodities such as precious metals. Before knowing more about these types ETFs let us have a glimpse at ETFs in general. EFT’s are similar to stocks which are traded on stock exchanges. ETF’s combine the features of a unit investment trust and a close ended fund. They can be traded throughout the day at the prices which may can differ from second to second to that of its net asset value or can be bought or sold at the end of the day at its settled net asset price. An ETF may have stocks, commodities or bonds associated with it in form of underlying assets. They also provide a higher level of tax efficiency to the investors

What makes up Commodities ETFs

Commodities ETFs are those exchange traded funds which have commodities like precious metals and futures as underlying assets. The commodities ETFs came into existence with the evolvement of the gold exchange traded funds which had been used in various countries. They allow the investors to invest in commodities like agricultural goods, natural resources and precious metals with ease and high efficiency but without having to purchase the underlying futures contracts. Commodities ETFs are the index funds which track non-security based indices and so they are not regulated as investment companies under the Investment Company Act, 1940 of the United States of America. They are still under the supervision of Securities and Exchange Commission (SEC) at some points.

Also called ETC’s

Commodities ETFs are often called as exchange traded commodities (ETCs). They follow the price of underlying commodity. The commodities ETFs trade just like shares. Investing in commodities ETFs is very simple and can be high return yielding. They have proved to be one of the most preferred methods of diversifying investor investment portfolio’s in recent years. An investor can buy or sell commodities ETFs anytime during the trading day. Improvements in technology and product innovation have made investing in commodities ETFs easy and a very popular way of investing.

The market has witnessed the new issuance of abundant new commodities ETFs. The statement holds true that today most of the commodities ETFs do not hold physical commodities in their portfolios. They instead use future contracts for the same underlying. This has made the commodities ETFs face higher risk of default by the future’s issuer.

Some of the commodities ETFs are focused on a single commodity. Other types of commodity ETFs are premeditated to track the performance of a basket of commodities and certain commodity index which encompasses different types of commodities including physical storage and commodities.

The counter-effect on commodity prices

When Investors try to earn profits from commodities ETFs, they indirectly participate in increasing commodity prices. Though there are several forces which affect the prices of a commodity like demand-supply, other studies show that the prices of commodities are highly affected by the related commodities ETFs. These investments are resulting in higher inflation and a steeper decline in currency value. Thus investing in these funds today can give good returns to investors but as a result of the investment activities, this can adversely affect the exchange rate of investing country.

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