Commodity ETFs: Exploring New Mines for Wealth
Those who keep an eye on financial hot topics may have noticed that recently, precious metals and commodities have been developing quite strongly. Correspondingly, related ETFs have also been rising rapidly.
Why are commodities worth paying attention to?
As an alternative investment, commodities can play a unique role in diversified portfolios.
First, commodity prices are typically uncorrelated with traditional asset classes such as stocks and bonds, reducing overall portfolio risk. Second, rising commodity prices help hedge against inflation risk and protect the real value of a portfolio. In addition, supply and demand dynamics have a significant impact on commodity prices, allowing investors to capture investment opportunities by understanding these dynamics.
Why choose ETFs to invest in commodities?
The reason why investing in commodity ETFs is popular among many investors is that:
(1) They can achieve risk diversification by combining multiple commodity assets and maintain high liquidity and low thresholds in exchange trading;
(2) Compared to direct investment in futures or derivatives, ETFs have lower management costs and trading fees, and are managed by professional teams, eliminating the need for investors to deal with complex issues such as contract rollover and warehousing logistics;
(3) In addition, ETF holdings information is transparent and publicly available on a daily basis, which is helpful for investors to make wise decisions. Many commodity ETFs closely track various commodity indexes, allowing investors to participate fully in the performance of the entire commodity market, not just single commodity price fluctuations.
In summary, ETFs themselves have diversified properties, which can reduce the risk of investing in commodity futures, options, or stocks. With many advantages such as convenience, transparency, liquidity, and relatively low cost, ETFs have become an attractive investment tool for entering the commodity market.
Specific situation of commodity ETFs
To understand the specific situation of commodity ETFs, we need to first clarify which categories they include.
In the U.S. stock market, according to Futu's ETF classification, commodity ETFs mainly include crude oil logistics, energy, and precious metals, among others.
(Tip: Enter the Futu app homepage, click the question mark in the upper right corner, and enter the ETF page to explore various products on your own.)
Among them, precious metals and energy, in particular, have performed very well recently:
Let’s focus on the strong ETFs under the overall commodity market:
1. Energy ETFs
Energy ETFs are ETFs that target energy-related companies and invest in energy commodities such as crude oil, natural gas, coal, and nuclear energy.
With the development of the global economy and changes in the energy market, the market size of energy ETFs continues to expand. At present, energy ETFs mainly cover oil and natural gas, renewable energy, nuclear energy and other fields. At the same time, the types of ETFs are becoming more and more diverse, including leveraged ETFs, inverse ETFs, etc. We select a few of them with better trading volume and introduce them to you:
(1) $First Trust Exch Traded Fund 2 Energy Alphadex Fd Usd (FXN.US)$:An ETF that tracks companies in the U.S. energy industry and is designed to provide exposure to the U.S. energy industry. The ETF's portfolio includes oil and gas mining, energy services, renewable energy and other energy-related companies. FXN's investment portfolio covers different areas of the US energy industry and can help investors cover the entire US energy market. Its advantages include a broad investment portfolio, risk diversification, low expense ratio, etc. However, FXN is also subject to industry risks and market risks in the U.S. energy market.
(2) $United States Natural Gas (UNG.US)$:It is a type of exchange-traded fund. The investment strategy of this ETF is to track the price of natural gas by investing in natural gas futures contracts. During periods of increased seasonal demand, such as during winter, natural gas prices may increase, leading to investment opportunities. However, due to the large fluctuations in natural gas prices, UNG's investment risks are higher and are more suitable for investors with strong risk tolerance.
(3) $iShares Global Clean Energy ETF (ICLN.US)$:The investment strategy of this ETF is based on global renewable energy companies, including solar energy, wind energy, hydro energy and other fields. It is a good choice for investing in the renewable energy industry. The investment portfolio is relatively diversified and covers renewable energy companies in different regions around the world. The investment risk is low, and the investment strategy is in line with the concepts of environmental protection and sustainable development, and is favored by society and the market.
2. Precious metal ETFs
Among them, you can refer to this issue for gold ETFs:Complete Analysis of Hong Kong and U.S. Gold ETF Investments Amidst Gold Market Frenzy
In this article, we focus on introducing you to the following three silver ETFs with the highest trading volume:
(1) $iShares Silver Trust (SLV.US)$:A silver-based ETF. The goal is to earn a return on investment by investing in the price of silver. This ETF invests in silver futures contracts and tracks silver price movements in the London silver market. SLV is a liquid ETF that can be easily bought and sold. However, SLV's management expense ratio is relatively high at 0.50%.
(2) $Sprott Physical Silver Trust (PSLV.US)$:An ETF based on silver, but unlike SLV, PSLV holds physical silver bars rather than silver futures contracts. Investors buying shares of PSLV are equivalent to taking ownership of physical silver bars. PSLV's investment portfolio is composed of physical silver bars, which allows investors to directly participate in physical transactions of silver. However, due to the storage and custody required to hold physical silver bars, PSLV has higher fees, with an administrative expense ratio of 0.45%.
(3) $Abrdn Silver ETF Trust (SIVR.US)$:It is also a silver-based ETF that holds physical silver bars. SIVR's investment portfolio consists of physical silver bars, which allows investors to gain direct ownership of physical silver bars. SIVR has a relatively low overhead rate of 0.30%. However, SIVR's operating expenses may be higher due to the storage and custody required to hold physical silver bars.
To summarize, SLV, PSLV, and SIVR are all silver-based ETFs, but their investment strategies and portfolios are different. SLV invests in silver futures contracts, PSLV and SIVR hold physical silver bars. Investors can choose ETFs that suit them based on their investment preferences and risk tolerance.
3. Crude oil ETF
Accordingly, we still select the three crude oil ETFs with the highest trading volume to introduce to you:
(1) $United States Oil Fund LP (USO.US)$: An ETF that tracks the price of WTI crude oil. This ETF tracks the fluctuations in the price of WTI crude oil by investing in crude oil futures contracts. The advantage of USO is that it allows investors to participate in the crude oil market at a relatively low cost without directly purchasing crude oil. In addition, USO is a relatively liquid ETF and is easy to buy and sell. However, USO has disadvantages such as rolling costs and market risks caused by the rolling of futures contracts.
(2) $ProShares UltraShort Bloomberg Crude Oil ETF (SCO.US)$: An ETF that is bearish on crude oil and aims to provide contrarian exposure to the price of WTI crude oil. The ETF achieves its objective by investing in oil price futures and other derivatives. The advantage of SCO is that it can provide protection against falling oil prices, which makes it an investment tool during a falling crude oil market. However, SCO also carries high risks associated with short-term trading and speculation.
(3) $SPDR S&P Oil & Gas Exploration & Production ETF (XOP.US)$: An ETF that tracks companies in the U.S. oil and gas industry. The ETF's portfolio includes companies in oil and gas exploration, extraction and production. The advantage of XOP is that it can cover the entire US oil and gas industry, including production, mining, exploration and other different links, thereby diversifying industry risks. Additionally, XOP has a relatively low expense ratio. However, XOP is also subject to industry risks and market risks in the oil and gas market.
In addition, there are raw materials-related ETFs under the commodity category. Since the overall trading volume is small, I won’t go into details here. You can check it out on the MOOMOO market page~
However, although ETFs are good, there is one thing that needs to be reminded:
For ETFs with futures contracts as the underlying assets, the performance may be somewhat different from the actual asset price - the price of the futures contract includes storage fees and other costs, so the price of the futures contract itself may be higher than the spot price. Its value is not only affected by the price of the underlying object itself, but also includes additional factors such as the time value of the futures contract and extension costs.
If the futures contract price already includes the expected increase in spot prices, then even if the spot price does increase, ETF holders may not be able to reap the benefits of the increase.
Commodity ETFs with spot as the underlying asset will be much better. Therefore, if you do not want to bear the risks caused by other factors, investing in spot ETFs will be more stable and cost-effective.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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