Q How can I gain access to commodities without having to buy a collective investment scheme/fund? I understand that the costs of buying plus annual management charges are much lower through Exchange Traded Funds than that incurred with normal investment funds - is this the case and how can one buy such commodity ETFs?
A Exchange Traded Funds, or ETFs, are index funds that trade just like stocks on major stock exchanges. The big difference is that ETFs are the most practical and cheapest vehicle. There are ETFs for large US companies, small ones, real estate investment trusts, international stocks, bonds, and even commodities.
ETFs differ fundamentally from traditional mutual funds, which do not trade midday. Traditional mutual funds take orders during trading hours, but the transactions actually occur at the close of the market. The price they receive is the sum of the closing day prices of all the stocks contained in the fund. This is not the case for ETFs, which trade instantaneously all day long and allow an investor to lock in a price for the underlying stocks immediately. So if you see a price falling during trading hours, you can sell immediately and not at the resultant closing day's price, as happens through a fund.
ETFs are very economical to buy and especially to maintain over the long-run, making them especially attractive for the typical buy-and-hold investor. Annual fees are as low as 0.1% of assets, which is incredibly low when compared to the average mutual fund's annual management fee of 1.4%.
If you wish to gain exposure to commodities then you can do so through ETFs. You can invest in the minute-by-minute price of individual commodities such as oil, sugar or even live cattle! To avail yourself of such opportunities then you should approach an investment services provider with the resources to make such purchases on your behalf and that offers an advisory service on when to sell, etc.
Commodities used to be considered 'alternative investments' but due to the development of global capital markets and new financial products that provide simple market access, commodities are becoming widely accepted as a mainstream asset class.
It is also a particularly exciting time for commodities with worldwide demand growing fast, particularly in China and India with the trend set to continue. ETFs are the cheapest way to access the exciting world of commodities and are as far-reaching as gold, coffee and soybeans.
Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com.
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Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.