Sign up  |  Log in

Alternative Investments: Commodity

Is commodities ETF a direct or indirect commodity investment?

You’ve made it this far, and you know what it takes to pass. Don’t be fooled by false promises and unrealistic claims. Schweser’s CFA® study packages give you the proven study tools and expert instruction you need to finish the job.

Good question. Exactly there are 3 kinds of commodities ETFs. First hold physical commodities, second uses only derivatives thus is synthetically exposed, third has stocks of companies which exploit commodities. I would say all but third are directly exposed to commodities.

play it again, Sam

since its a fund - i’d say indirect

The fact this is fund does not mean indirect exposure. And you may trade ETFs as ordinary stock on market.

play it again, Sam

companies that exploit commodiest is INDIRECT. 

investments in actual commodities or futures on commodities or ETFs that invest in futures of commodities are DIRECT

rollerbladerlevel3 wrote:

companies that exploit commodiest is INDIRECT. 

investments in actual commodities or futures on commodities or ETFs that invest in futures of commodities are DIRECT

Did I say something else? BTW, I was investing in commodities ETFs. There are commodity ETFs which invest solely to mining companies thus those ETFs are indirectly exposed to commodities and are listed under commodity ETFs.

See:

http://etf.stock-encyclopedia.com/category/commodity-etfs.html

play it again, Sam

I think mutual funds vs ETFs may come up somewhere on the exam…pretty nuanced differences (5 of them)

I could only think of (ETF):
- No record keeping of shareholding
- Fees paid to S&P etc
- Possibility to trade during the day

What else would you say?

- ETFs are more tax effective than mutual Funds.

play it again, Sam

My understanding of Direct Investing in Commodities is having the bushel of corn dropped off in your driveway… Go long a futures contract, and dont take an offsetting position before maturity, you better start looking for a silo to store it…

Direct investment in commodity :

  • Buy physical commodity

Indirect investment in commodity :

  • Commodity stocks
  • Commodity mutual funds
  • Commodity futures index (commodity etf and commodity certificate)
  • Commodity futures contract

This is my understanding, someone please correct me if I am wrong ….

Commodity futures are a direct investment. Not entirely sure about the certificate but I would venture they are also a direct investment. 

Futures return = excess return = spsot return + roll return

2 return components  in case of investment in futures contract

3 components in total return commodity index, 4 components in fully collaterized portfolio of futures positions

However, if we directly invest in physical commodity there is only 1 return component i.e. spot return

Above were the basis of my understanding …

Voyager3 wrote:

Commodity futures are a direct investment. Not entirely sure about the certificate but I would venture they are also a direct investment. 

Thanks

Direct: Actual commodity and derivatives

Indirect: Everything else.

Not much to it.

It means :

Direct investment ( commodity ) 1) buying physical commodity 2) publicly traded derivatives such as commodity futures …

Indirect investment ( commodity ) all other forms of investment

Direct investment ( real estate ) buying physical property … Sole as well as in partnership

Indirect investment ( real estate ) publicly traded REATS …