Investing in commodity mutual funds is one of the best means of hedging a portfolio that is otherwise dominated by stocks against unexpected financial or political crises or ordinary economic downturns.
For example, in the wake of the Great Recession, during the late 2000s into the early 2010s, gold prices advanced from a little over $1,000 an ounce in 2008 to over $2,000 an ounce in 2011. There is a historical tendency for an inverse relationship between stocks and commodities; when the overall stock market is in a bear market, commodities tend to experience a bull market.
Mutual funds provide investors with easy exposure to the commodities markets while avoiding the complications and additional risks of directly trading highly leveraged commodity futures. Commodity mutual funds typically invest in both the stocks of companies involved in commodities such as mining companiesand in commodities proper.
One advantage of this approach to commodity investing is that commodity mutual funds may perform well even when commodity prices overall are not. Mining company stocks may rise even during a period when the spot price of the mined commodity is falling. Other factors in addition to commodity prices that impact the stock prices of companies in commodities-related businesses include the companies' debt and cash flow situations.
Key Takeaways
- Investing in commodity mutual funds is a great way to diversify a portfolio of stocks and bonds.
- Commodity mutual funds can also act as a hedge against inflation depending on the specific commodity.
- Mutual funds are a great way to gain exposure to commodities without actually having to purchase a physical commodity or other complicated instruments, such as futures or options.
- Commodity mutual funds can still perform well even if some of the underlying commodities are not.
- Three commodity mutual funds for consideration include Gabelli Gold Fund Class A (GLDAX), Invesco Balanced-Risk Commodity Strategy Fund Class A (BRCAX), and BlackRock Commodity Strategies (BICSX).
1. Gabelli Gold Fund Class A (GLDAX)
The Gabelli Gold Fund Class A is a good mutual fund for investors specifically seeking exposure to the gold and precious metals markets. Launched by Gabelli Funds in 1994, its primary investment aim is long-term capital growth.
Under ordinary circ*mstances, at least 80% of the fund's assets are invested, along with borrowed capital for investment, in both U.S. domestic stocks and foreign stocks of companies principally engaged in gold-related business operations.
The fund manager looks for gold-related stocks that are currently undervalued and that have above-average growth potential. A substantial portion of assets may be dedicated to foreign stockssince many of the major gold-mining companies are headquartered outside the United States. Any dividends or capital gains are distributed annually.
As of Dec. 31, 2021, the top holdings are metals and mining companies, such as Newmont Corp. (9.2% of holdings), Franco-Nevada (7.2%), Wheaton Precious Metals (5.7%), and Barrick Gold (5.6%). Investments are concentrated in North America, making up 71.2% of the portfolio.
As of March 14, 2022, the fund has assets of $422 million, an expense ratio of 1.48%, a one-year return of 16.69%, a five-year return of 10.13%, and a 10-year return of -0.41%.
The fund appeals to those investors seeking long-term goals, like retirement, and if the risk appetite is higher, with the understanding that the payoff is in long-term returns.
2. Invesco Balanced-Risk Commodity Strategy Fund Class A (BRCAX)
The Invesco Balanced-Risk Commodity Strategy Fund Class A offers investors a broader basket exposure to the total commodities market. This fund launched in 2010 and has an investment goal of maximum return on investment (ROI).
The fund's assets are typically invested in derivatives and other commodity-based investment instruments that are expected to reflect the overall performance of the underlying commodities and that provide exposure to four of the major commodity market segments.
Those segments are precious and industrial metals, energy, and agriculture. Such investments commonly include futures and swap agreements. The fund also invests in U.S. Treasury securities and debt securities of other countries. The fund may also make use of investments in commodity-based exchange traded funds (ETFs) or exchange traded notes (ETNs). Capital gains or dividends are distributed annually.
Top holdings include gold 2.5x index Citi 01 (7.97% of holdings), soybean futures (7.58%), XB gasoline RBOB future (6.52%), WRI roll yield BARC ER swap (6.05%), and aluminum MACQ Dynamic ER swap (5.30%).
As of Feb. 28, 2022, the fund has assets of $1.24 billion. It has an expense ratio of 1.40%, a one-year return of 19.85%, a five-year return of 5.43%, and a 10-year return of -1.71%.
3. BlackRock Commodity Strategies Fund (BICSX)
The BlackRock Commodity Strategies Fund, launched by BlackRock in 2011, offers investors exposure to fourprincipal commodity groups: energy, precious metals, industrial metals, and agriculture.
The fund's investment aim is long-term capital appreciation. The fundimplements two basic strategies to achieve the fund's stated investment goal of capital appreciation. These strategies are (1) commodity-linked derivatives and (2) equity investments in commodity-related companies including mining, energy, and agricultural companies. The fund is invested in U.S. domestic and foreign stocks.
BlackRock is the largest asset manager in the world in terms of assets managed.
Top holdings include Chevron (2.8% of holdings), Shell (2.27%), Total Energies (1.77%), ConocoPhillips (1.48%), and Exxon (1.35%).
As of March 14, 2022, the fund has assets of $2.2 billion, an expense ratio of 0.72%, a one-year return of 26.54%, a five-year return of 8.08%, and a 10-year return of 0.21%.
What Are Commodity Mutual Funds?
Commodity mutual funds are investment funds that seek exposure to commodities. These funds typically invest in a basket of commodities, with exposure to energy, agriculture, and metals. The investment strategy for each commodity mutual fund differs, with funds seeking to hold the physical commodities, some investing in futures, and others investing in commodity-related companies.
Are Commodities High Risk?
Investing in commodities is typically higher risk than investing in stocks and bonds. The commodities markets are typically volatile, complex, and require experience in understanding and trading. Much of commodity trading is speculative, therefore best suited for investors with a high risk tolerance. Commodity mutual funds or exchange traded funds can provide investors with exposure to commodities on a lower-risk basis.
Should I Invest in Commodities?
Investing in commodities can be a great way to diversify your portfolio, especially if it is concentrated in equities and bonds. Commodities have a low correlation to stocks and bonds and, therefore, can act as a hedge to downturns in the market. That being said, commodities can be riskier, and less experienced investors may be better off gaining exposure to commodities through mutual funds or exchange traded funds.
