Investing in commodities can be a profitable endeavor, but unlike the stock market where a passive investment in a broad-based index can yield average results, passive investment in a broad-based commodities index suffers from many problems. The Wall Street Journal highlights some of the challenges passive commodities investors face. If you are going to invest in commodities, stick with an active approach.
Commodity indexes haven’t provided that same kind of “significant persistent level of return over time,” says Amanda Agati, an investment strategist at PNC Institutional Asset Management in Philadelphia. For instance, major broad indexes of commodities have registered negative returns over the past 10 years. And commodities tend to be more volatile than stocks, Ms. Agati says.
The upshot: Simply betting that commodity indexes inevitably will rise over the long term won’t work, Ms. Agati says.
Unlike for stocks, the influence of technology on commodities is deflationary.
Consider the massive profits generated by tech companies like Facebook Inc. and Alphabet Inc. New technology has helped power big gains in those stocks. And technology has helped fuel gains in stocks outside the tech sector, as well, by improving the productivity of many companies. But technology generally has had the opposite effect on commodities.
When investors buy commodities, they sometimes end up paying for the cost of storage.
For example, the cost of storage is baked into a futures contract for 1,000 barrels of crude oil. “You are basically buying the futures five bucks above the spot price,” says Mr. Cherem, using a theoretical example in the oil market.
Those costs eat away at any profits, or worsen any losses.
Read more here.
Jeremy Jones, CFA
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