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Commodity ETFs: A better way to diversify portfolio risks

Astha Jain
Hem Securities

Commodity ETFs are Exchange-traded funds that invest in physical commodities such as agricultural goods, energy resources and precious metals. The ETFs are great investment vehicles for investors who need to hedge risk or want to gain exposure in physical goods. They are economical to buy and cheap to maintain over the long run.

A commodity ETF can have exposure in a group of commodities or sometimes just a single commodity. Most commodity ETFs invest in futures contracts, but they do not use leverage. This prevents the fund from running into a negative balance situation.

Commodity ETFs are quite simple to trade. With one trade, one has instant exposure to the price and performance of a particular commodity. Capital gains taxes aren’t incurred until the sale of the ETF, which give ETFs a tax advantage over other investment products such as mutual funds. One can participate in commodities market by investing in a commodity ETF . It can also diversify investment portfolio specially of those who are quite optimistic about global economy. The strength in US economy and rising trend of other emerging markets are making commodity ETFs an attractive destination to deploy the funds. Additionally, commodities are witnessing a declining correlation with equities, hence giving a better choice to diversify one’s risk. With the declining trend in correlation with equities, commodity ETFs are becoming a major source of diversification as this correlation was high during the financial crisis .The major reason attributed to rise in correlation were rise in inventories during crisis era and predominance of risk on /risk-off trading after massive monetary stimulus. With the gradual withdrawl of QE packages & increase in volatility, these correlations are on declining mode. They are down to pre financial crisis level. Also, rise in geopolitical tension among various nations from time to time makes commodities asset class a ready option to invest the funds in.

In India, some Gold ETFs which are presently trading actively on main bourses include names like Axis Gold Exchange Traded Fund, Goldman Sachs Gold Exchange Traded Scheme, HDFC Mutual Fund– HDFC Gold Exchange Traded Fund, IDBI Mutual Fund – IDBI Gold ETF, Kotak Gold Exchange Traded Fund, Motilal Oswal MOSt Shares Gold Exchange Traded Fund, Quantum Gold Fund - E T F, R* Shares Gold ETF, SBI Mutual Fund - SBI Gold Exchange Traded Scheme - Growth Option, UTI Gold Exchange Traded Fund.

These ETFs provide safer investment bets in Commodities market for those who wants to invest in this market but do not have the time or knowledge needed to invest in individual securities and contracts.


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