Commodity and Currency ETFs

Exchange-traded fund (ETF) issuance has been expanded well beyond stock and bond indexing. Funds are now available in several alternative asset classes, including individual commodities, commodity futures, futures indexes, and foreign currencies. These new products are playing an expanding role in portfolio management.

The advantage of adding an alternative asset class such as commodities to your portfolio is that they tend to exhibit a low correlation with traditional stock and bond investments over the long term. (See Chapter 17.) Low correlation between two asset classes means that when one is going up, the other may or may not be following; it could be heading in the opposite direction. That lowers overall portfolio volatility.

In addition, individual commodity sectors tend to have low correlations with one another. Thus, the theory is that diversifying into many commodities through a commodity futures index may be more beneficial than owning single-commodity ETFs.

There are many disadvantages to owning commodity products in a portfolio. The cost of investing in commodities is high compared to stocks and bonds, they lack a real expected long-term return (no inflation-adjusted return), and commodities and futures products have low tax efficiency.

Commodities Basics

Commodities are common products, such as food, basic materials, and energy-related items, that are used every day. Food products include items such as sugar, corn, and oats; ...

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