Commodities have been one of the hottest areas in the financial markets in recent years, but investors need a cool hand to gauge where and when to enter the game.
These days, investors have a wide array of choices in making commodities a part of a diversified portfolio. Choices include futures and options, ETFs, mutual funds, individual stocks of companies involved in the production of a commodity or even buying a piece of the raw material itself, as in the case of gold coins.
“We’ve seen acceptance in the last five years of derivatives as a legitimate and acceptable asset class for retail investors,” says Randy Frederick, director of derivatives at Charles Schwab. “While individual circumstances will vary, you can probably look at 5 percent to 10 percent of a portfolio in commodities.”
ETF Entry Point
For retail investors, one of the easiest ways to access commodities is through exchange-traded funds, or ETFs, especially those providing exposure to a range of different commodities, analysts say. Dabbling in the futures markets is probably best left to the professionals.
“If choosing an ETF, the broad commodities ETF is the way to go for portfolio diversification,” says Karen Dolan, mutual fund analyst at Morningstar Inc. “Given strength in this area it is prudent to invest slowly over time to avoid coming in at the top.”