What is ETFs?

Nowadays, we hear this term has a lot – exchange traded fund ETFs. Let us understand this and how it can be a good investment in your portfolio.
Exchange Traded funds ETFs are a basket of funds that can be traded like stocks. Let us understand by an example. We all very well know about Nifty 50. It’s the top 50 stocks that are sold in the NSE. Let’s say that we want to trade in the Nifty 50 stocks. For most of us, investing in all 50 stocks is challenging, and you can even trade or buy Nifty as that’s an index. Here comes NIFTYBEES, an ETF by Nippon India that can be easily bought or sold just like stocks. Nifty bee is a basket of the top 50 nifty stocks. It moves similarly to the Nifty 50 index.

Types of exchange traded fund ETFs

Index ETFs – This kind of exchange traded fund ETFs is made by picking top stocks of any index, e.g. NSE, BSE

Fixed Income ETFs–These ETFs are made out of bonds like government bonds, company bonds

Industry-specific ETFs: As the name suggests, they are made by bundling any industry. It may be the auto industry, pharma industry, IT stocks, green energy stocks, etc.

Commodity ETFs: These are made for tracking or trading commodities like gold, silver, oil, etc.

Foreign Market ETFs–These are designed by bundling foreign or Non – Indian markets. E.g., DOW, NYSE.

Commodity exchange traded fund ETFs

In this article, we will focus on the commodity exchange traded fund ETFs.
As briefly explained earlier, commodity ETFs comprise physical commodities such as agricultural goods, natural resources, and metals. For example, you would like to buy/invest in gold. There are multiple options–you can buy physical gold, jewellery stocks, futures for gold or gold ETF.
If you buy physical gold, it needs to have a decent investment, and it will also be a hassle to store. When the price rises, you again have to sell it to get returns.
If you buy stocks of jewellery brands, they might fluctuate and go up or down based on gold prices, but other factors will also be factored in for their performance in the stock market. It will not be similar to gold returns. For more info, check gold returns and any jewellery brand stock returns.
Buying futures is a different, complicated process, and it will be beyond most ordinary people’s understanding of how it operates. It’s high-risk trading.
Buying Gold ETFs is the best option if you want returns similar to gold. It fluctuates similarly to the gold market and can be easily bought and traded in the stock market. The most popular is Goldbees. It will be very similar if you check Goldbees and Gold market’s performance YoY.
So, if you are interested in investing in commodities, ETFs are the best option. Similar to gold ETFs, we have ETFs for silver, oil, crude, cotton, jute, etc.

Types of commodities:

Hard commodities:

Precious Metals: Gold, Platinum, Copper, Silver.

Energy: Crude oil, Natural gas, Gasoline.

Soft Commodities:

Agriculture: Soybeans, Wheat, Rice, Coffee, Corn, Salt, Cotton, Sugarcane, Jute.

Livestock and meat: Live cattle, pork, Feeder cattle.

Of all these, only Gold and Silver ETFs are popular in India. We all know why! Know more about Soft commodities and how you can trade them.

Why Should you buy Commodity exchange traded fund ETFs?

Diversification of a portfolio is one of the essential parts of successful investment. Most people need to pay more attention to the importance of commodity exchange traded fund ETFs. It’s an excellent tool for hedging. Let’s understand this via an example. Recently, when there was a war between two countries, it shook the entire stock market. Those who had heavy equity portfolios suffered huge losses. During this time, oil prices went up, and if someone had kept crude and oil ETFs in their portfolio, it could have easily balanced out the losses.
Whenever there is inflation, natural resources and raw material prices go up, thus providing an excellent return to commodity ETFs holders.
According to a renowned ETF analyst, Huemmer, “Over that intermediate time horizon, commodities and natural resource equities have historically done an excellent job battling inflation and giving investors an alternative source of returns of stocks and fixed-income securities”.
These ETFs are inexpensive investment tools. Investing in commodities can be expensive and time-consuming. Additionally, prior experience working with derivatives and futures transactions is required. Exchange traded fund ETFs that invest in commodities are passively managed funds because they track a commodity index. As a result, fund management is much less expensive than actively managed plans.

Factors to consider before investing in commodity ETF

Return and growth: Before investing in any commodity, we should check how much return it has generated. As they are highly volatile, and the price fluctuates based on environmental factors and global sentiments, we should be cautious and invest accordingly.

Purpose of investment: As mentioned above, commodity exchange traded fund ETFs should be kept in the portfolio for hedging and diversification. We should not have only commodity ETFs in our portfolio.

Risk: As it is very volatile, it’s a hazardous investment. Suppose you bought crude ETFs during a war crisis expecting a high return. But once war ends and the economy becomes stable, the prices will decrease, affecting your return. Let’s look into an Indian example to understand this. Prices of gold go up during the wedding and Diwali seasons. If you buy during that time without analysing, you will suffer a loss once those seasons end.

External factors: Any circumstance that impacts the overall production of the specified goods exchanged can result in price changes. For instance, an increase in production costs may result in higher market prices for a product, which will impact the equilibrium rate.

Additionally, the stock and bond markets’ performance impacts commodity prices because a negative outlook on their performances tends to direct investors towards securities on the commodity market. Individuals frequently trade commodity derivatives to offset stock market risks or protect their portfolios from downturns.

How to invest and buy commodities ETF

Commodity exchange traded fund ETFs, such as gold, can be purchased online and deposited into your Demat account, allowing you to enter and exit whenever you want.
Commodity Samachar provides a platform to buy and invest in commodity ETFs.