The misconception by the general public and many investors is that the only way to invest in commodities is through commodity futures contracts. That can be a risky endeavor for a novice trader and that is typically not a good investment for an IRA. However, there are many safer ways to invest in commodities and they can be an excellent addition in the allocation of a diversified IRA.
There are several types of investments that investors can make in commodities for their IRAs:
- Commodity ETFs
- Commodity based mutual funds
- Managed Futures
Commodity ETFs for an IRA
I like commodity ETFs because they are simple for investors to understand and they can buy and sell them just like stocks. Almost any brokerage firm and online brokers allow investors to purchase commodity ETFs.
There are a wide variety of funds to choose from. Some invest specifically in one commodity. Others invest in a group of commodities that are fairly diversified. These commodity ETFs invest in futures contracts, but they are unleveraged. This means there is much less risk and you can’t lose more than your initial investment.
Some of the more diversified commodity ETFs include: DB Commodity Index Fund (DBC), GSCI Commodity-Indexed Trust Fund (GSG), Rogers International Commodity ETN (RJI) and Continuous Commodity Index Fund (GCC).
There are also commodity ETFs that allow investors to short commodities. Some investors might like to invest in specific commodities like gold or silver. There are ETFs for most individual commodities, but some are fairly illiquid. For purposes of an IRA, it is usually advised to stick with a diversified group of commodities and hold for the long-term.
Commodity Mutual Funds for an IRA
A commodity-based mutual fund invests in stocks that are involved in commodities industries. They typically benefit from rising prices of commodities or an increased demand in commodities. An example would be a gold mining company like Newmont Mining (NEM). The company mines gold and other metals; benefitting from higher prices.
Some of the better performing commodity mutual funds of 2012 were: Invesco Balanced Risk Commodity Strat A (BRCAX), PIMCO CommoditiesPLUS Strategy A (PCLAX), Columbia Commodity Strategy W (CCSWX) and Rydex Commodities Strategy H (RYMBX).
Managed Futures for an IRA
Managed futures are probably one of the best ways to invest in commodities – especially for an IRA. Managed futures are actively managed funds by a Commodity Trading Advisor (CTA). These are professional commodity traders who have designed trading systems and strategies to maximize returns in commodity trading.
Obviously, some CTAs are better than others. Do your homework and find a CTA or fund that suits your risk tolerance and check for a track record of returns. The good thing about CTAs is they are able to make money regardless of whether commodity prices move up or down.
Many investment advisors recommend allocating 5 to 10 percent of your overall investment portfolio to commodities. An allocation in commodities does not mean that a novice investor should day trade commodities in an IRA. Investors should incorporate more of a buy and hold strategy for retirement funds.
Professional money managers (CTAs) sometimes use a shorter timeframe for holding periods, but they typically have a system that works well over a long period of time. Many CTAs are trend followers and they benefit from commodity prices making long-term trends higher or lower. Some exploit short term movements in price and do very well over time.
Regardless of the instruments used to invest in commodities, they can help lower the overall risk in a retirement account and even increase the overall returns. Many studies have been done to substantiate these facts – so don’t be afraid to accept commodities as part of an IRA, but do it smartly.