ETFs can offer exposure to the commodities market, which has the potential to protect against inflationary risk and to capture capital appreciation.
Like stocks, bonds and real estate, commodities are an important asset class. Commodities are tangible assets used to manufacture and produce goods or services. Specific examples of basic commodity categories include agriculture, energy, livestock, metals, timber and textiles. In the agriculture segment, familiar commodities include cotton, coffee and wheat. In the energy area, examples of commodities include natural gas and crude oil.
Adding commodities to an investment portfolio can provide greater diversification and may help to reduce portfolio volatility. Historically, commodities have had low correlations to stocks and bonds. One contributing factor to low correlations is that commodity prices are affected by different risk factors, such as disease, storage capacity, supply, demand, delivery constraints and weather.
Because of those risk factors, even a well-diversified investment in commodities can be uncertain. Diversification does not guarantee profit or protect against loss in a down economy, and being tied to physical products can magnify that risk.
Investors should consider the investment objectives, risks, charges, and expenses of an Exchange Traded Fund (ETF) carefully before investing. A prospectus contains this and other information about the ETF and can be obtained from the issuer. The prospectus should be read carefully before investing.