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Andrew Michael
Editor
Updated: Jul 28, 2022, 7:00pm
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Commodities are defined either as natural resources that are mined and processed or as agricultural products that are grown or raised. They’re used far and wide, from the production of food and energy to the manufacture of essential consumer goods.
In the FAQs below, we explain more about commodity funds. We’ve also asked Rob Morgan, chief investment analyst at wealth managers Charles Stanley, to identify five commodities funds that are suitable for would-be investors.
You can read his selections below, listed in alphabetical order, along with the reasons for his choices, as well as his overarching investment methodology.
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- Featured Partner
- Best Commodities Funds
- BlackRock Gold and General
- iShares Physical Gold ETC
- Schroder ISF Global Energy
- TB Amati Strategic Metals
- Methodology
- Frequently Asked Questions
Guides To Investing
- Best Investment Trading Apps
- Best Trading Platforms
- Best Trading Platform For Beginners
- Best Trading Platform for Day Trading
- How To Buy Stocks
- Best Lifetime ISA
- Best Robo-Advisors
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Best Commodities Funds
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BlackRock Gold and General
Fund type
Unit Trust
Fund size
£1.0bn
Benchmark index
FTSE Gold Mining
Fund type
Unit Trust
Fund size
£1.0bn
Benchmark index
FTSE Gold Mining
Annual fund charge
1.17%
Key points
- The fund aims to provide a return on investment over the ‘long-term’. This is defined as five or more consecutive years beginning at the point of investment.
- The portfolio is run on a worldwide, ‘actively managed’ basis, investing at least 70% of its assets in companies which derive a significant proportion of their income from gold mining or other commodities such as precious metals. ‘Actively managed’ means the fund’s manager makes deliberate decisions about whether or not to include a particular company within the portfolio.
- The fund’s performance is largely driven by the gold price itself, as well as the operational performance of the underlying companies within the portfolio.
- The portfolio is managed by BlackRock’s natural resources team, featuring a robust investment process and proprietary research designed to drive strong returns.
The fund holds between 50 to 80 companies, including Newmont Corporation and Barrick Gold Corp. - The majority of holdings are established gold producers, with some exposure to pure exploration stocks (typically riskier in this sphere). The ratio between the two is relatively low compared with peers, reducing slightly the day-to-day volatility associated with investing in this area.
Who should invest?
This is an adventurous fund for ‘gold bugs’ who believe the price of bullion will rise over time and that gold miners will provide an extra boost through their increased earnings.
Shares in gold mining companies are a higher risk means of exposure to the price of gold. They tend to represent a ‘geared’ play on the gold price, meaning they multiply the effect of a rise – but also exaggerate any falls.
The fund should only represent a small position in a typical portfolio given its highly specialist and risky nature.
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Schroder ISF Global Energy
Fund type
SICAV
Fund size
£453m
Benchmark index
MSCI World Energy
Fund type
SICAV
Fund size
Benchmark index
MSCI World Energy
Annual fund charge
1.3%
Key points
- An actively managed fund investing in the shares of companies in the energy sector in four main areas: long life North American gas producers, diversified global integrated oil companies, diversified global oilfield service companies and low-cost oil producers.
- The manager focuses on being invested in ‘best-in-class’ companies that have strong balance sheets and cash generation in order to help mitigate some of the risk that comes with operating in such a cyclical industry. A cyclical industry is one that is sensitive to the business cycle.
- The fund holds a concentrated portfolio of 35 to 45 companies, including Galp Energia SGPS and Coterra Energy Inc., so the individual selections each have a significant bearing on returns.
- However, the most important determinant of performance will be oil and gas prices, alongside economic, political and regulatory events.
Who should invest?
The cost of oil and gas was already rising before Russia’s invasion of Ukraine, but Russia’s status as a major energy exporter and the heavy sanctions imposed on the country have exacerbated the issue.
Hands-on investors concerned about sustained, longer term higher prices, and willing to embrace the risks, could look to a small position in this fund to help balance a more broadly-based portfolio.
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TB Amati Strategic Metals
Fund type
OEIC
Fund size
£56m
Benchmark index
EMIX Global Mining Index
Fund type
OEIC
Fund size
£56m
Benchmark index
EMIX Global Mining Index
Annual fund charge
1.0%
Key points
- A relatively new fund that takes an active approach to investing in the mining sector, aiming to actively manage an optimal combination of precious, specialty and base metals at any given time.
- Holds a concentrated portfolio of 35 to 45 companies, including higher-risk smaller stocks, so the individual selection by its managers will have a significant bearing on returns. Largest holdings include Fresnillo and AngloGold Ashanti.
- The fund targets specialty metals companies which will play a future role in the global energy transition, producing ‘battery metals’ such as lithium which is vital to making electric vehicles work.
- Adopts a ‘Clean Trade’ approach, avoiding companies which support oppressive regimes.
- The fund contains a balance of industrial and precious metals exposure, reflecting that the cycles of these two areas are often different, which leads to a more diversified portfolio and the ability to add value in a greater variety of conditions.
- Managed by a team with specialist expertise and knowledge of both the geological and financial elements of the mining sector.
Who should invest?
The transition to cleaner, sustainable energy sources and a lower carbon world is one of the defining trends of this decade. This fund offers an interesting route by investing in the companies producing the industrial metals vital to making this change a reality.
A high level of volatility is to be expected, which is par for the course for the economically sensitive and highly cyclical areas of commodities But it should interest adventurous investors wanting to invest a small part of their portfolio ‘thematically’ in an important, structural growth trend.
Methodology
Charles Stanley’s Rob Morgan says his fund selection philosophy is to concentrate on the four Ps: people, process, performance and price. This is done, he explains, by “examining key characteristics such as risk, style, sustainability, governance, charges, operations, inflows/outflows and capacity constraints”.
Morgan adds: “We aim to identify the key factor, or ‘edge’, a fund possesses. This might be that it does something differently or better, or in the case of passive or tracker funds, which aim to follow rather than beat an index, it might be that they offer the lowest charges available for the approach taken.
“Within the selection we want to encompass different styles and approaches to provide diversification and reduce reliance on certain sectors or types of company.”
Featured Partner Offers
1
eToro
Invest in a wide variety of commodities
Explore gold, silver, oil, wheat and more on eToro
1
eToro
On eToro’s Website
2
Interactive Investor
UK’s 2nd-largest investment platform for private investors
Leading flat-fee provider
2
Interactive Investor
On interactive investor’s Website
76% of retail investor accounts lose money when trading CFDs with this provider.You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Frequently Asked Questions
Why invest in stocks and shares?
There are numerous reasons for investing in the stock market – from taking the fight to inflation and making your money work as hard as possible, to building a retirement nest egg.
Every form of investing carries a risk and stock market investing is not for everyone. But if you’ve weighed up the pros and cons and have time on your side (an absolute minimum of five years), the next consideration is deciding exactly how you’re going to gain exposure to stocks and shares.
You could, for example, invest all your money in a single company. But this would be very risky because, if that company failed (and they do), you’d potentially lose a large proportion, if not all of your cash, in one go.
What is an investment fund?
Investment funds, in contrast, help investors to diversify their money while providing access to the stock market. Funds do this by investing in a basket of companies chosen on your behalf by a professional portfolio manager.
Contributions are pooled from potentially thousands of investors, with the proceeds managed according to strict investment mandates, each with a particular target. This might include aiming to outperform a benchmark stock market index, such as the FT-SE 100 index of leading UK companies, by a specified amount each year: 1%, say.
Funds invest in a range of assets – from cash and bonds, to property and equities (both domestic and international) – each with varying risk profiles. Note that ‘equities’ is an interchangeable term for ‘stocks and shares’.
There are different types of investment fund, including: Exchange-Traded Commodity (ETC); Open Ended Investment Company (OEIC); Société d’Investissem*nt à Capital Variable (SICAV); and Unit Trust.
Each name refers to the way a fund is put together and how it works from day to day. However, the overall idea of pooling money contributions of multiple investors holds true for each type.
What are commodities?
In essence, commodities are the basic stuff of life – raw products that can be bought and sold around the world, often in bulk. They include oil, gold, wheat, coffee and pork bellies.
Commodities break down into two main groups:
- ‘Hard’. These are commodities that are mined or extracted from the earth, including energy products such as crude oil, coal and natural gas. Also included in this sector are precious, base and industrial metals including gold, silver, platinum, copper, aluminium, nickel and lithium.
- ‘Soft’. These are commodities that are reared or grown, such as livestock and meat, coffee, wheat, soybeans, and cotton.
Commodities of the same quality or grade are often described as ‘fungible’. This means that they are interchangeable, irrespective of where they were mined, produced, or grown.
Commodities are bought and sold in bulk on exchanges, in the same way as stocks and shares. The largest exchanges include the London Metal Exchange, Chicago Mercantile Exchange and Europe’s Intercontinental Exchange.
What are commodities funds?
It’s possible to invest in commodities in several ways, including by buying physical goods direct or by buying into companies connected with the mining, manufacture or production of commodities.
Commodities funds are made up of companies which are somehow involved with the raw materials or primary agricultural products that are outlined above. Because of their unique make-up, commodities funds offer several potential benefits to investors:
- Diversification. Historically, commodities funds have had low correlation with stock market movements. In other words, they do not necessarily rise and fall in tandem with the performance of other equities-based investments. Spread across a broader portfolio, this provides investors with useful diversification.
- Protection against inflation. Commodities tend to be non-correlated with stock market movements but do tend to rise with inflation. This makes them one of the few asset classes that benefit from the usually financially corrosive influence of rising prices.
- Financial growth. Commodity prices tend to rise and fall in tandem with supply and demand. The greater the demand for a commodity, the higher its price will rise, benefiting investors in the process.
Commodities funds occupy a niche sector but often themselves specialise in a particular segment of the market such as precious metals, energy production, or timber/agriculture/livestock management.
How do I invest in a commodities fund?
You can buy directly from a fund provider, or purchase holdings via an online investing platform, trading app, or through a financial adviser. Pay special attention to fund charges and administration fees as these will ultimately bite into the performance of any investments that you make.
How much do commodities funds cost?
The commodities funds highlighted above include an annual fund charge figure. This provides an indication of the fund’s annual running costs and comprises a manager’s fees, along with administration, marketing and regulatory costs. The idea is to produce a standardised method of comparing the costs of funds.
For example, a £1,000 investment in a fund with an annual charge of 1% will cost £10 a year. Bear in mind that additional administrative/dealing charges may also apply depending on how the fund was bought – direct from the provider, say, or via an investing platform.
How do I invest tax efficiently?
Individual savings accounts (ISAs) are a form of financial wrapper that offer a tax-free way to save and invest. A stocks and shares ISA is a tax-efficient product that allows would-be investors to gain exposure to the stock market.
Tax treatment depends on one’s individual circ*mstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.
Guides To Investing
- Best Investment Trading Apps
- Best Trading Platforms
- Best Trading Platform For Beginners
- Best Trading Platform for Day Trading
- How To Buy Stocks
- Best Lifetime ISA
- Best Robo-Advisors
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Andrew MichaelEditor
Associate Editor at Forbes Advisor UK, Andrew Michael is a multiple award-winning financial journalist and editor with a special interest in investment and the stock market. His work has appeared in numerous titles including the Financial Times, The Times, the Mail on Sunday and Shares magazine. Find him on Twitter @moneyandmedia.
