Definition
The term commodity fund is used to describe a portfolio of financial instruments that provide the investor with shared ownership in a variety of commodities. These funds allow individuals to participate in the commodities market without the need to learn about futures.
Explanation
There are a number of ways an investor can profit from the movement of commodity prices over time. For example, they can purchase a futures contract for crude oil, coffee, and sugar. It's also possible to buy metals such as iron, nickel, copper, gold, and platinum.
Commodity funds allow investors to participate in this market, and benefit from the expertise of the fund's management team. They also allow investors to participate in a diverse set of commodities, such as precious metals, without the need to construct and manage a portfolio.
True commodity funds will actually hold the physical asset, while commodities futures funds will hold derivative instruments. For example, a gold fund that holds gold bullion would be a true commodity fund. Finally, investors can also buy shares of a commodity index fund, which purchases and sells futures contracts in an attempt to replicate the performance of an index.
Related Terms
target date fund, adjustable rate preferred stock, bond fund, real estate fund
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