then investors have the option of using leverage. One of the drawbacks to this type of investing instead of using Futures is that the brokerage commission tends to be higher and you don't get the same dollar move in the ETFs as you would the Futures. The traders profit potential can be less because they are not using leverage and incurring larger commissions. You need to make sure you check with your broker before you start this type of trading.
Since the bull market in Commodities began back in 2002, investors have seen Commodities become their own asset class. Investors are
looking for hard assets to place in their portfolios to protect against inflation and diversification to add to their profits.
With this diversification comes a negative correlation between Commodities and Stocks. A recent study shows that the correlation
between the UBS Commodity Index and the Stock market was only .33 over the last ten years.
Some of the ETFs that are related to Commodity investing. ETFs can lose as much as five to ten per year of their return value in some Futures markets because of this type of situation. This becomes more of a problem if you select an ETF that is Commodity specific GLD Gold, USO Oil, UNG Natural Gas, because any of these markets could be in contrast and each time the ETF has to rollover their contracts, the fund will take a profit hit.
Remember that word diversification? Well, it applies in
ETFs also. By investing in ETFs that track the broad Commodity indexes as opposed to Commodity specific indexes such as Gold, Oil,
Natural Gas, you will have a portfolio of a group of Commodities and not all of them will be in conflict at the same time.
Some may actually be inverted markets and this offers great pricing at rollovers for the ETFs. You should see how inverted
markets offer lower prices with each succeeding contract. One note of caution about Commodity ETFs: Always read the broker's prospectus and make sure that the ETF is tracking the physical Commodities and that the ETF is not tracking companies related to producing or processing these Commodities.