A different approach to commodity investing
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Christine St Anne is Morningstar's online editor.
Exchange-traded fund (ETF) provider ETF Securities recently launched a myriad of exchange-traded commodities (ETCs).
"The new ETCs cover single commodities such as Brent crude oil, natural gas, copper, corn and wheat," Morningstar co-head of research Tim Murphy says.
"There are also commodity baskets covering energy, industrial metals, agriculture and all commodities," he says.
These ETCs track the performance of the Dow Jones-UBS Commodity Index.
All up, there are now around 20 ETCs in the Australian market.
Investors have traditionally got exposure to commodities by investing in resource companies. However, by investing in resource companies, investors are taking on the added equity risk, ETF Consulting principal Tim Bradbury says.
"A stock like Santos (STO) is more correlated to the equity market than it is to its exposure to natural gas," Bradbury says.
"These ETCs give investors direct exposure to commodity prices without the equity risks," he says.
ETCs also allow investors to take a precise exposure to a particularly commodity.
"Investors can get direct access to single commodities such as natural gas or copper without having to be exposed to a broader commodity market," Bradbury says.
Investing in commodities gives investors the ability to hedge part of their portfolio against inflation.
Commodities also add to portfolio diversification, as these assets are generally uncorrelated to equities.
ETCs are also liquid, allowing investors to trade in and out of them, according to their investment time horizon.
Morningstar's Murphy says it is important that investors really understand the structure behind these ETCs.