Like stocks or bonds, commodities are considered a separate asset class that investors can hold in a portfolio.
A commodity is a commercial good that is used in trade and exchangeable with other commodities of the same type. Investors should note how commodities are different from stocks, which are shares of a publicly traded company, and bonds, which are debt instruments issued by companies and government agencies.
Some commodities, like oil or gold, investors may already be familiar with, but there are many other types that are traded daily around the world. Prices are affected by a number of things ranging from supply and demand, the value of the U.S. dollar, weather, and more. With around 30 different types of commodities available, investors have the ability to fine-tune their portfolio and gain access to a more diverse range of investments to boost returns or mitigate risks.
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The Two Big Commodity Exchanges
There are two primary commodity exchanges investors should be aware of – the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE), an electronic commodity marketplace. CME is one investors may have heard of before and has been around since 1898 when it was founded as an agricultural exchange. It’s now known as the largest options and futures open interest exchange in the world trading in everything from commodities to interest rate swaps and handles contracts worth around $1 quadrillion in total on an annual basis. It’s actually made up of four different exchanges – CME, CBOT, NYMEX and COMEX.
ICE is the most popular commodity and futures exchange in Europe, but it operates electronically around the world and doesn’t have a physical trading floor like CME. The only remaining physical commodities trading floor in Europe is the London Metal Exchange (LME). ICE, like CME, offers a variety of commodity products including financial derivatives. ICE has been steadily growing over the past several years and operates on various other exchanges in the U.S. and Canada such as ICE Clear US and ICE Clear Canada. However, investors don’t need to worry about which exchange they are using since commodity values aren’t affected by foreign currency or accounting differences.
Overall, the concept of the physical trading floor is becoming obsolete. Future commodities exchanges will likely become entirely electronic, eliminating the archaic open outcry style of trading that required people to actually exchange shares and contracts face-to-face.
How to Invest in Commodities
There are two main types of commodities traders. The first are those that actually buy or produce a commodity and use commodities contracts to lock in prices ahead of time or hedge against future downside price risks. For example, a farmer that grows soybeans may decide to trade in a futures contract to lock in the price of his agricultural commodity as a way of hedging against the risk of the price of soybeans dropping by the time his crops are ready to be harvested. The downside to this trade is the opportunity cost missed if soybean prices were to instead rise higher than expected. He would be obligated to sell his soybeans at the price agreed upon in the futures contract.
Institutional and sophisticated investors typically trade commodities by using futures contracts as a way of speculating on prices. Instead of trading actual goods like producers do, speculators seek to profit from the rise or fall in the value of a commodity. They may engage in various futures contracts and strategies ranging from arbitrage to carry trades in order to establish a position.
For everyday investors, investment vehicles like mutual funds and ETFs are more commonly used. Because of the complexity, risk and high initial investment amounts needed for futures trading, mutual funds and ETFs give investors access to commodities that they otherwise wouldn’t be able to get. Through mutual funds, investors will have the benefit of professional management, while ETFs offer selective exposure to commodities.
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What Types of Commodities Can You Trade In?
A commodity is a good that has a uniform standard of quality regardless of where it originates from. As such, traditional goods such as oil, natural gas, gold, wheat, soybeans, cotton and others are some of the most recognizable commodities to investors. In recent years, however, other financial products such as foreign currencies have been added to the list of commodities that investors can trade in.
Here’s a list of 14 high volume commodities traded on U.S. exchanges:
|Commodity||Sub-Group||Exchange||Contract Expiry||Contract Size||Last Traded Price ($) - Time|
|Energy||NYMEX||Dec, 2018||1,000 barrels||$68.7 - Sept 4 (15:05 PM CT)|
|Energy||NYMEX||Dec, 2018||10,000 MMBtu||$2.9319 - Sept 5 (09:17 AM CT)|
|Energy||NYMEX (NY Harbor ULSD Futures)||Dec, 2018||42,000 gallons||$2.2374 - Sept 4 (09:32 AM CT)|
|Agriculture||IFUS (Sugar No. 11 Futures)||Mar, 2019||112,000 pounds||$11.50 - Sept 4 (16:59 PM GMT)|
|Energy||NYMEX||Dec, 2018||42,000 gallons||$1.9415 - Sept 5 (09:20 AM CT)|
|Metals||COMEX||Dec, 2018||100 troy ounces||$1,197.8 - Sept 4 (14:23 PM CT)|
|Agriculture||CME||Dec, 2018||5,000 bushels||$368.4 - Sept 4 (14:49 PM CT)|
|Agriculture||CME (KC HRW Wheat Futures)||Dec, 2018||5,000 bushels||$535.4 - Sept 5 (09:22 AM CT)|
|Agriculture||CME||Nov, 2018||5,000 bushels||$839 - Sept 5 (09:23 AM CT)|
|Metals||COMEX||Dec, 2018||25,000 pounds||$2.598 - Sept 4 (14:28 PM CT)|
|Agriculture||CME||Dec, 2018||60,000 pounds||$28.75 - Sept 4 (13:19 PM CT)|
|Metals||COMEX||Dec, 2018||5,000 troy ounces||$14.215 - Sept 5 (09:25 AM CT)|
|Agriculture||IFUS (Cotton No.2 Futures)||Dec, 2018||50,000 Lbs.||$81.70 - Sept 5 (14:34 PM GMT)|
|Agriculture||IFUS||Dec, 2018||10 metric tons||$2,324 - Sept 4 (17:29 PM GMT)|
Other commodities may also be traded but don’t have the same level of trading volume as the 14 listed above. Interest rate swaps, foreign currency futures, and other financial derivatives can also be found on both CME and ICE, but are typically treated as separate types of commodities for investment purposes.
Commodities aren’t created equal. There are a number of various sectors within the commodities space, similar to how stocks operate in the market. They may fall under categories such as energy, metals, rare earth metals, precious metals, agricultural, soft, and more. Investors should carefully research what each sector does and how it could apply to their portfolio before investing.
Click here to learn more about Rare Earth Metals.
The Bottom Line
Investors looking to broaden their portfolio of stocks and bonds might want to consider commodities. From energy products to metals to agricultural goods, there are a number of opportunities for added diversification. Regardless of the exchange used, commodities are able to easily trade hands creating a streamlined global economic process that investors can partake in at any level of sophistication.
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