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.
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.