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Commodity ETFs

Commodity Exchange Traded Funds

For those interested in trading physical commodities, commodity exchange traded funds are an excellent and useful vehicle. These funds allow you to invest in commodities like agricultural goods, natural resources, and precious metals with ease and precision. Some commodity ETF's are structured to focus on single commodities. Holders of these types of funds will have their investments placed in a physical storage area, and sometimes they also invest in contracts for futures. Other commodity ETF's are designed to track performance of a certain commodity index which includes many different varieties of commodities in a combination of physical storage and derivatives.

Commodity ETF's often use the leverage of purchasing derivative contracts. Because of this they often have large amounts of un-invested cash which is then utilized to buy Treasury securities or other very low risk assets.

Usually commodity funds design their own benchmark indexes, and this means that tracking error may occur around the broader commodity indexes such as Dow Jones AIG Commodity Index. Once the underlying index methodology is employed, commodity ETF's must be passively invested. The popularity of commodity indexes in recent times has been the result of the exposure to various commodities that they provide. Investors do not need to learn how to purchase futures or other derivative products before investing in a commodity ETF.