A commodities index fund is a type of mutual fund that is based on the performance of an underlying commodity or portfolio of commodities. A commodity, which is not classified as a security under the provisions of the federal Securities Act of 1933, are any material or natural resource that may be transformed into a consumer product or good. Examples of commodities include oil, sugar, oranges, cattle, hogs, gold, etc. Commodities are traded in a commodities market, which sets the price for these materials and resources. Transactions are made as a way for producers to lock in prices as well as by speculators who are looking to profit from price movement, either up or down. A commodities index fund is a securitized version of a commodity that is tracked in the stock market, such as the New York Stock Exchange. The top three commodities index funds are the Harbor Commodity Real Return Strategy Fund, Eaton Vance Commodity Strategy Fund, and the Invesco Balanced Risk Commodity Strategy Fund. Keep reading to learn the most commonly asked questions about commodities index funds, so you can choose the one that's right for you.
Commodities funds work in the same manner as any other type of mutual fund. Investors purchase shares in the fund, which represent a proportional percentage interest in the fund. The investment manager for the fund, based on the stated investment policy of the fund, is free to invest in direct commodities and commodity related businesses, such as companies that manufacture and/or process raw materials and natural resources.
Assets that make up a commodities index includes any raw material or natural resource commodity that is traded on a national commodities exchange. They can vary from crops, such as corn, wheat, and rice, to oil, to precious metals, which include silver, gold, copper, and nickel (an important component of cellular telephone technology).
A commodities index fund is a security (under federal securities law) whose value is derived from the trading activity of an individual or group of individual commodities such as oil and corn, which trades on a commodities exchange. Individual commodities are not considered securities but are governed under rules established under the Commodities Exchange Act of 1936.
The ownership interest in a commodities index fund, which is a mutual fund under the Investment Company Act of 1940, represents a full and fractional interest in the portfolio under which the commodities are held; it does not however represent a direct investment in any individual or group of individual commodities.
Commodities funds receive the same treatment as other types of mutual funds. Dividends are generally reinvested in the fund while capital gains (the amount that the fund appreciates from its initial value) are subject to taxation when realized. If within 12 months, these gains are treated as short-term capital gains, which is a higher rate than long-term capital gains that are taken after the investment has been held for more than one year.
Commodities index funds are as affordable to purchase and own as other types of mutual funds. Investment minimums may be established by the fund sponsor that may be as low as $500 or $1,000 for individual retail accounts, or $25 to $50 through a regular interval investment account, such as an individual retirement account.
Most investments in commodities index mutual funds, including exchange traded funds (ETFs) and exchange traded notes (ETNs) may be done through any registered securities representative or directly with the company that serves as the sponsor of the fund. Accounts may be established online or in-person, with the assistance of the securities representative.
As a security, commodities index funds are subject to the same capital or principal risk (the potential loss of some or all of the principal amount invested) as other types of securities. Commodities may also be subject to other types of risk such as price volatility risk, where a drought or an oil spill may cause supplies to be less than demand, forcing prices to spike.