What’s The Fuss About Commodity Index Funds?
Commodities generally are items that come from the earth or are grown. Commodities include oils, cotton, livestock, metals and minerals and sugar, coffee or cocoa. Crude oil, hog bellies, wheat and corn are also included in that group. Commodity index funds are a collective investment company that tries to track the movements of an index of a specific financial market, in this case, commodities. Commodity index funds mimic the overall performance of the market.
There are a number of commodity index funds available from a variety of vendors. Commodities tend do well when stocks and/or bonds are in decline and under-perform (because of recession fears) when stocks and/or bonds are on the rise (since “things” become relatively less valuable than operating companies). Of course, there are always exceptions to every rule, so mechanical rules-based trading is discouraged. Commodities can benefit from and create inflation, sometimes at the same time. But that does not lessen the value of index investing generally, it just means trying to pick peaks and valleys is a fruitless endeavor.
Some financial experts predict we are on the verge of a potential commodity bull market. With that in mind and knowing that the market will go through corrections, the index fund entrepreneurs will ride the market out while the less adventurous will jump ship at the first sign of a dip. Some of the corrections will be moderate with only a slight fluctuation in market rate while other corrections will be severe and almost bottom out. Again, since it’s impossible to tell a correction from a bear market ahead of time, buy-and-hold is the best policy.
A lot of the index funds on the market today are “buy only” funds. That means investors buy commodity future contracts when investor money comes in and only sell when investors diversify or redeem their funds, usually for something other than a commodity. This shouldn’t affect your investment strategy, however. In case you’re wondering, buy-and-hold is still the best policy (just like it was last paragraph!).
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