Commodity funds are considered an alternative investment to bonds and stocks. Though only a small portion of your total portfolio should be invested here, before investing, it is important to understand the terms contango and backwardation.
Many commodity funds purchase limited time period futures contracts and as they expire, the money is rolled forward to the next contract. Investors lose money when expiring contracts are rolled into higher cost future contracts. That is actually common and this is why some commodity funds lose money as the price of the commodity goes up.
Backwardation occurs when those future contracts are priced less than the current expiring contract.
High-priced commodities may purchase the actual item, like some precious metals (gold, as an example), and avoid the futures contracts altogether but if you do not understand these concepts then I would fully understand them first before investing in them. Know what your fund strategy is and how it works.
There are some commodity futures funds that rotate and shift their weightings based on the "roll yield" to help minimize the effects of contango. They are relatively new and it remains to be seen if the strategies used will be effective.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.