Commodities are, for the most part, necessities. And in tough economic times they can serve as a hedge against inflation in a well-diversified portfolio.
What are commodity stocks?
Commodities are basic goods, such as oil, wheat or cattle. Commodity stocks are shares of companies that operate in those spaces, such as oil refineries, wheat producers or meat-processing companies. Commodity stocks represent things people need, such as food and energy. This can potentially make them strong additions to an investment portfolio.
Here are the seven best-performing commodity stocks from Fidelity's Global Commodity Stock Fund (FFGCX). This fund offers a good representation of several commodities-based industries, including the energy, metals and agricultural industries. This fund may include international as well as domestic stock.
The three main benefits of commodity stocks are hedging against inflation, diversifying your investment portfolio and potentially paying dividends.
Since commodity stock prices increase when the price of commodities increase, commodity stocks may work well to combat the effects of inflation. That’s particularly true if you’re getting close to retirement, already have other retirement-worthy investments such as bonds, Treasurys or money market funds, and want to protect your investment portfolio's value. If you have a well-diversified portfolio to begin with, and you’re investing over a long period of time, you may benefit just as well (if not more) by focusing on stocks that have long-term growth potential.
Commodity stocks may increase your portfolio’s diversification because commodities are found in so many sectors. And since commodities are often necessities, it is less likely consumers will cut back spending in the commodities sectors when times are tough. This is in contrast to other areas that may be considered discretionary, such as travel or restaurants.
Some commodity stocks pay dividends, but not all do. The best dividend stocks don’t necessarily pay the highest dividends, but commodity companies with a history of paying reliable dividends and strong financial fundamentals may be worth investigating if you’re looking for commodities exposure.
Commodity stock risks
One of the biggest cons of commodity stocks is that they are fairly reliant on political and climate events, and can be volatile as a result. For example, extreme weather creates risks for crops and livestock, and international affairs can have a significant impact on oil prices. The other risk of commodity stocks is exactly that: They’re individual stocks. Individual stocks harbor all the risks of the singular company they represent. Commodity exchange-traded funds, or ETFs, however, allow you to invest in lots of different commodity stocks at the same time. This can reduce your risk and increase your portfolio’s diversification.
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According to Bob Minter, director of ETF investment strategy at abrdn, a global asset management company, the top-five most popular commodities are oil, natural gas, gold, silver and copper.
This means that when other investments decline, commodities may provide a cushion against losses. Secondly, commodities have the potential to act as a hedge against inflation. As prices rise, the value of commodities often increases, providing a valuable store of wealth.
Brent Crude oil is the most traded global commodity. Brent Crude is extracted from the North Sea and accounts for two-thirds of global oil pricing. Like the other crude oil benchmark WTI, Brent Crude is mainly refined into diesel fuel and gasoline. Brent Crude is generally slightly more expensive than WTI crude oil.
Introduction: My name is Gregorio Kreiger, I am a tender, brainy, enthusiastic, combative, agreeable, gentle, gentle person who loves writing and wants to share my knowledge and understanding with you.
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