If someone told me a few years ago that I’d be genuinely excited to talk about soybeans and crude oil, I’d have laughed. But here I am, geeking out over commodities—and for good reason. If you’re wondering what are commodities and how to invest in them, you’re not alone. I was in the same boat until I realized just how powerful these raw materials could be in diversifying a portfolio and protecting against inflation.
Let me break it down in a way that’s not dry (like wheat futures—sorry, had to!).
What Are Commodities?
Commodities are basic goods that are interchangeable with other goods of the same type. Think of them as the raw building blocks of the global economy. We’re talking about things like:
- Energy: Oil, natural gas
- Metals: Gold, silver, copper
- Agricultural products: Corn, wheat, coffee, soybeans
- Livestock: Cattle, hogs
They’re typically standardized, meaning a barrel of crude oil or a bushel of corn is the same regardless of who produces it.
Why Do Commodities Matter?
Commodities are essential for daily life. If you eat, drive, or use a smartphone, you’re benefiting from commodities. But beyond their usefulness, they’re a unique asset class for investors.
What drew me in was how they often move differently from stocks and bonds. For example, when inflation goes up (like it has recently), commodities tend to increase in value. That can help protect your purchasing power.
Why I Started Investing in Commodities
A Wake-Up Call From Inflation
In 2022, I watched my grocery bill balloon and gas prices hit what felt like record highs. It wasn’t just annoying—it was a financial reality check. My stock-heavy portfolio was feeling the pinch, and I realized I needed a hedge.
That’s when I came across an article about how commodities often perform well during inflationary periods. I thought, “Why not put my money where the inflation is?”
Diversification Beyond Stocks
I’d always heard about diversification, but I thought having a mix of tech, healthcare, and financial stocks was enough. It wasn’t. When the market dips, they often dip together.
Commodities, on the other hand, sometimes go up when stocks go down. That counterbalance can make a big difference in reducing portfolio volatility.
How to Invest in Commodities
If you’re wondering what are commodities and how to invest in them, here’s the practical part. You don’t need to own a silo of wheat or a herd of cattle. There are several user-friendly ways to get started:
1. Commodity ETFs and Mutual Funds
This is where I started. ETFs (exchange-traded funds) and mutual funds let you invest in a bundle of commodities—or in companies that deal with them.
Examples:
DBC: Invesco DB Commodity Index Tracking Fund
GLD: SPDR Gold Shares
USO: United States Oil Fund
Pros:
Easy to buy through any brokerage
Diversified
No need to worry about futures contracts
Cons:
Some may come with high expense ratios
Prices don’t always move 1:1 with the underlying commodity
2. Futures Contracts (Advanced)
Futures are agreements to buy or sell a commodity at a set price on a future date. They’re how commodities are traditionally traded.
I personally haven’t ventured here yet—it’s complex, risky, and requires a deep understanding of the market. But for advanced investors or those with specific hedging needs, it’s an option.
3. Stocks of Commodity Producers
Instead of buying gold, you can buy shares of a gold mining company. This is often referred to as “indirect” exposure.
Some companies in this space include:
- ExxonMobil (energy)
- Barrick Gold (gold)
- Archer Daniels Midland (agriculture)
- This was my next step after ETFs. It felt like a good middle ground—easier than futures but more focused than a general ETF.
4. Physical Commodities
Yes, you can actually own some commodities—especially precious metals like gold or silver.
I bought a few silver coins as a sort of “just in case” stash. It’s not my main investment strategy, but it feels good to have something tangible.
Risks of Commodity Investing
- Let’s be real: commodities can be volatile.
- Weather can affect crops.
- Geopolitics can spike oil prices.
- Demand shifts can send prices swinging.
- My first foray into oil ETFs was a rollercoaster—up 20% one month, down 10% the next. It taught me to size my investments appropriately and not chase quick gains.
Tips I Learned (the Hard Way)
- Start small: My first investment was $500 in a commodity ETF.
- Do your homework: Read up on the supply/demand trends.
- Don’t go all-in: Keep commodities as a slice of your portfolio pie (I keep mine under 10%).
Why I’m Sticking With Commodities
- Since diversifying into commodities, my portfolio has become more balanced. When the S&P takes a hit, sometimes oil or gold cushions the blow. That peace of mind is worth a lot.
- Plus, it’s just fascinating. I’ve learned more about global trade, supply chains, and even weather patterns than I ever expected. (Did you know a drought in Brazil can impact coffee prices globally?)
Final Thoughts: Should You Invest in Commodities?
- If you’re trying to understand what are commodities and how to invest in them, my advice is: Start with curiosity, then move with caution. You don’t have to become a commodities expert or day trade pork bellies. But adding a little exposure can provide protection, growth, and insight into how the world runs.
- For me, investing in commodities turned out to be less about chasing returns and more about preparing for the real world—where gas prices spike, crops fail, and gold glitters in times of uncertainty.
- So next time you fill up your gas tank or brew your morning coffee, think of it as more than a daily routine—it might just be an investment opportunity.
- Have you tried investing in commodities? Thinking about it? Let’s compare notes—I’m always up for a good chat about crude oil over coffee
Next Article To Read: Gold vs Silver: Which One I Chose First and Why