Alternative methods to investing

There are alternative (and cheaper) methods to get your portfolio some commodity exposure, such as purchasing ETFs or commodity-related stocks. Note: these methods still provide investors’ portfolios with a hedge against inflation.

Most retail investors choose ETFs to get commodity exposure. Some commodity funds buy physical commodities and then offer shares to investors that represent a certain amount of the good.

United States Oil Fund (USO)

A way to gain exposure to rising oil prices is via USO, which tracks the performance of near-month West Texas Intermediate crude oil futures contracts. As a futures-based fund, USO poses many risks, including high volatility and tracking error from the spot oil price. This makes it best suited for advanced traders. USO also has a high expense ratio of 0.81%

SPDR Gold Shares (GLD)

GLD holds deposits of physical bullion in secure vaults, with each share of GLD representing a claim to a fraction. The ETF has strong liquidity, high assets under management, and a robust options chain for traders. Buying GLD includes an expense ratio of 0.4%.

iShares Silver Trust (SLV)

This metal is primarily used as a hedging instrument for bearish times. Although the shares of the trust are not a direct substitute for actual silver, they still provide an alternative way for investors to participate in the commodities market. The fund offers a convenient way of obtaining exposure to silver without a need to actually hold silver since acquiring and storing silver can be very expensive/complicated. SLV comes with an expense ratio of 0.5%.

Some ETFs can be invested in through futures contracts. However, these prices take into account the storage costs for that commodity. Therefore a logistically expensive commodity might not be profitable, even if the spot price of the commodity rises.

Commodities-Related Stocks

Another option is for investors to purchase shares of companies that deal with commodities. For example, Vertex Energy (NASDAQ: VTNR) is an energy company focused on the production and distribution of conventional and alternative fuels. A benefit of this investment method is that a company’s value will not necessarily reflect the price of the commodity. Rather, what’s more important is how much of the commodity that company can produce overtime. If a company does not produce what investors anticipate, the stock can plummet.