Commodities exchange traded funds are type of exchange traded fund that specialize in physical commodities. Exchange traded funds are funds that hold securities which track an index, a commodity or a group of assets like index funds or bonds. Despite being a security, they trade like a stock on the stock exchanges. Exchange traded funds are bought and sold throughout the day and hence their price keeps on changing during regular trading hours. This is the reason why ETF net asset value’s (NAV) are not calculated daily as with mutual funds. Investors who own exchange traded funds get vast diversification of index funds along with the convenience to short sell, buy on margin and purchase in small quantities like one share.

What do Commodities Exchange Traded Funds contain?

When it comes to commodities exchange traded funds, they encompass all those ETFs which invest in commodities like precious metals or futures. The commodities exchange traded funds track the performance of the underlying physical commodities or commodities index. The commodities exchange traded funds are based on the price of commodities index allowing the investors to have direct access to a specific commodity without the need of taking delivery of physical commodity itself. Commodities exchange traded funds are traded just like shares making them highly accessible and affordable.

Commodity ETF Unique Features

A unique feature of the commodities exchange traded funds is that they are a form of open ended securities. New units of this fund can be created and the open units can be traded in the market depending upon the demand being created. This feature makes the fund operators ensure that the price of the commodities exchange traded funds in the market runs near to its net asset value (NAV).

Commodities exchange traded funds are meant to perform the same way the underlying commodity or commodities index does. This is because of the direct investment in the core asset or commodity derivative contract by the issuing company.

Classifications of Commodity ETFs

Usually commodities exchange traded funds are classified under major categories. For example, there is a category for:

• Energy based commodities exchange traded funds which include products like oil, natural gas and gasoline etc.
• Agricultural commodities exchange traded funds which cover agricultural produce
• Industrial metals commodities exchange traded funds which include metals like aluminum, copper and zinc.
• Precious Metals commodities exchange traded funds which include Gold, Silver and Platinum.

The trading in commodities exchange traded funds was first started with gold ETFs which is a part of the precious metals commodities exchange traded funds group. Investors find investing in precious metals CTFs to be a safeguard against financial or political instabilities and a tool for inflation hedging.

Inflation effects

The threat of inflation and ease of access of the commodities exchange traded funds have promoted the popularity of these funds. Investing in commodities exchange traded funds sounds to be very attractive to the investors. Diversification benefits are the biggest strength of these funds. But the investor should also keep in mind that the commodities exchange traded funds are very complex investment vehicles. Proper management of commodities ETFs are very important for investors to understand to be able to use these vehicles to provide investment profit.