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Invest in commodities and commodity funds
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Why and how to invest in commodities
Key takeaways:
- Are assets extracted directly from nature.
- Has a beneficial risk-return profile.
- Good for risk diversification, and can perform better when stocks and bonds do worse.
- Has historically been a good hedge against inflation.
- The share of commodities in a portfolio should be based on the investor's risk profile, time horizon, and the prevailing market climate.
AuAg Essential Metals
is a sector-specific fund that invests at least 90% of its assets in companies active in mining and processing essential metals, crucial for both traditional industries and emerging technologies. The fund emphasises investments in a variety of important metals like copper, lithium, and gold, with 25 equal-weighted holdings divided into the categories “industrial” and “tech metals”. It's actively traded with a focus on liquidity, and transactions are predominantly executed in highly liquid markets, with about 70% in the US and 30% globally.
AuAg Precious Green
Invest in copper, lithium, and rare earth metals through AuAg Precious Green. The fund is a daily traded fund that invests 60% in green technology companies and 40% in physical precious metals with a focus on gold. The investments include companies producing green energy, energy storage products, emissions-reducing products, and mining companies that extract essential elements for green technology manufacturing. The remaining 40% of the fund is allocated towards physical precious metals, primarily gold, but also silver, platinum, and palladium.
AuAg Silver Bullet
Invest in silver through AuAg Silver Bullet. This fund invests in 25-30 focused silver mining companies with high volatility and significant return potential, which is why it is called "Europe’s riskiest fund". According to the fund's overall strategy, at least 90 percent is placed in transferable securities and fund shares whose performance is assessed based on the market development of gold and silver.
AuAg Gold Rush
Invest in gold via AuAg Gold Rush. The fund invests in 25 gold mining companies that are equally weighted at 4% to allow a greater allocation towards medium-sized mining companies for better returns in a bull market for gold. The fund is rebalanced every quarter to ensure that only the top 25 companies with regard to sustainability (ESG risk rating) are included in the fund.
What are commodities?
Commodities are basic raw materials ranging from agricultural goods like wheat and cattle to energy sources such as oil and natural gas, as well as metals like gold, silver, and aluminium. They also include perishable "soft" commodities such as sugar, cotton, cocoa, and coffee. Historically, commodity trading has evolved from simple local trading to the sophisticated global markets of today, where futures and options are traded on exchanges worldwide. These markets allow producers to manage price risks by selling future production at agreed prices. Since the 1990s, commodities have become a distinct asset class, with the creation of futures indices and various investment options like mutual funds and exchange-traded funds, providing diverse ways to invest across different commodities and sectors.
The three categories of commodities are:
- Soft commodities (softs) include grown commodities, such as coffee, cocoa, sugar, corn, wheat, and soybeans.
- Hard commodities, such as gold, silver, copper, and lithium, are commodities extracted from the ground.
- Energy commodities, including electricity, gas, coal, and oil, are directly related to generating energy.
Why invest in commodities?
Commodities offer a unique investment opportunity for those looking to diversify their portfolio and seek protection against inflation. Investing in commodities can include everything from energy sources such as oil and natural gas to industrial metals like copper and aluminium, as well as precious metals such as gold and silver. These goods are critical components in many aspects of modern industry, technology, and manufacturing, which means they can have a direct connection to global economic development and technological advancements.
By including commodities in an investment portfolio, investors can benefit from price increases during periods of economic growth and heightened demand for these fundamental materials.
Why invest in a commodity fund?
Protect your portfolio
Investing in commodities can improve the risk-adjusted return in an investment portfolio. This means that commodities can generate a return in time periods when stocks and bonds decline in value.
Commodities have a low correlation to the rest of the stock market, which means that investments in commodities can yield returns when commodity stocks and bonds underperform. Commodities have historically proven to be valuable assets in a portfolio consisting of stocks and bonds. Industrial commodities such as silver and platinum tend to do well during periods of high growth, while gold and energy commodities perform better during recessions.
A simple way to gain exposure to the commodity market
Investing in commodity funds is an investor-friendly way to gain exposure to the commodity market. A manager allocates the assets when you invest in commodities through a fund. Investing in commodity funds involves a management fee, so reading the fund fact sheet before investing is important.
Spread the risks
Investing in commodity funds allows the investor to diversify the risks in their portfolio as commodities have low correlation or co-variation with the broad stock market. Including several uncorrelated assets in your investment portfolio contributes to a higher risk-adjusted return. Investing in commodity funds can also be a good hedge against inflation, as commodity prices have historically increased during periods of high inflation.
How much of a portfolio should I allocate toward commodities?
Experts usually recommend that around 4-15 % of the portfolio consist of gold to ensure a diversified portfolio. Depending on the investors' risk profile and the current market condition, the portfolio allocation towards commodities can be adjusted to a higher or lower level.
How much precious metals a portfolio should contain depends on the investment strategy and market scenario. According to Oxford Economics, a portfolio containing 5% gold is optimal in a 50-year market scenario with 2.25% annual growth and 2% inflation. If the growth or inflation is higher, the allocation towards gold should also increase.
The share of commodities in a portfolio is determined by the investor's risk profile, time horizon, and prevailing market climate.
At a time when, for example, both shares and bonds have low return potential, it can be interesting to increase one's commodity exposure and vice versa. Several successful investors and portfolio models advocate that up to 40 % of a portfolio's exposure should be allocated to commodities, e.g., Ray Dalio's all-weather portfolio and the dragon portfolio.
Do thorough research to find the best commodity fund for your investment strategy, and remember that historical returns are no guarantee of future returns.
What yield can be expected from commodities?
Commodities can be volatile, and high volatility, therefore, means a large upside and downside. High volatility in a rising market can generate high returns, and vice versa. The return distribution of commodities shows a positively skewed distribution, indicating a tendency for commodities to perform extremely well at certain times. Returns on commodities are strongest when inflation unexpectedly rises ー which usually coincides with falling stocks and bonds.
Investing in commodities protects the portfolio against inflation and provides a higher risk-adjusted return.
Why invest in commodities with AuAg Funds?
- AuAg Funds offers commodity funds that focus on providing exposure to precious metals and elements used in green technology. Commonly, these assets offer protection against monetary inflation and are essential in the transition to a green world – trends that are highly relevant today.
- AuAg's funds fit well into a portfolio of traditional assets as they have low correlation with stocks and bonds.
- AuAg Funds offers both daily traded and exchange-traded funds. Common to these is their focus on companies that extract gold and other precious metals.
- AuAg’s daily-traded funds are available in Sweden, Norway, Denmark, Finland, and Germany. You can invest in commodities by buying these funds via fund platforms such as Avanza, Nordnet, SAVR, and Fondo.
- Our Gold Mining ETF is available in the entirety of Europe and is listed on the following exchange platforms: Borsa Italiana, Deutsche Boerse Xetra, Euronext Paris, London Stock Exchange, and SIX Swiss Exchange.
Why invest in commodities with AuAg Funds?
- AuAg Funds offers commodity funds that focus on providing exposure to precious metals and elements used in green technology. Commonly, these assets offer protection against monetary inflation and are essential in the transition to a green world – trends that are highly relevant today.
- AuAg's funds fit well into a portfolio of traditional assets as they have low correlation with stocks and bonds.
- AuAg Funds offers both daily traded and exchange-traded funds. Common to these is their focus on companies that extract gold and other precious metals.
- AuAg’s daily-traded funds are available in Sweden, Norway, Denmark, Finland, and Germany. You can invest in commodities by buying these funds via fund platforms such as Avanza, Nordnet, SAVR, and Fondo.
- Our Gold Mining ETF is available in the entirety of Europe and is listed on the following exchange platforms: Borsa Italiana, Deutsche Boerse Xetra, Euronext Paris, London Stock Exchange, and SIX Swiss Exchange.
Some of the most traded commodities include:
- Precious metals (gold, silver, platinum, etc.)
- Oil
- Natural gas
- Petrol
- Corn
- Wheat
- Soybeans
- Cattle
- Pigs
- Sugar
- Timber
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