When new investors consider their options, they’re likely tempted by headline-grabbing assets such as tech stocks or cryptocurrency, which present an opportunity to invest in the next big thing.
But neophytes looking for a roller-coaster ride of risk and reward might want to look past the high-tech offerings to something more elemental – such as coal or soybeans. Commodities might lack the hype of other investments, but, as the fluctuations of the markets since Russia’s invasion of Ukraine demonstrates, they certainly require a certain tolerance for risk.
“People look at some sectors of mining and commodities trading as having a similar gambling ethos as crypto,” says Eddie Kofman, a mining industry analyst in Toronto.
Buying into the commodities themselves – through future contracts, for example – is not recommended for the average retail investor because of the calculations and expertise needed to assess prices and volatility. Instead, investing in stocks, mutual funds and exchange-traded funds are the most common and safest entry point.
Julie Shipley-Strickland, a senior wealth adviser with Wellington-Altus Private Wealth in Calgary, says that her clients – and especially younger ones – are coming to her more frequently with questions about commodities, even before the war in Ukraine. “Over the last 18 months we’ve been seeing an uptick of people acquiring commodities through stocks or ETFs for their portfolio.”
There are many rewards associated with commodities. Some are less correlated to the stock market – meaning that they can insulate a portfolio from market volatility. Traditionally, precious metals such as gold and silver are seen as hedges for inflation and are often recommended for longer-term holdings. Indeed, amidst the turbulence of the past few weeks, gold and silver prices have ticked up, countering the stock market’s periodic swift declines.
Part of the risk associated with commodity investing is its technical nature. Unless an investor is keeping up with trade news and research developments, supply and demand can fluctuate in ways that might be difficult to predict. Take rare earth minerals, for example. They are popular with investors excited about their use in electric vehicle batteries, but the chemistry of batteries is constantly being redeveloped – shifting long-term demand and anticipated returns.
For the average investor without the time to keep up with scientific changes and innovation, both Mr. Kofman and Ms. Shipley-Strickland say ETFs with a more diversified base can be a good first step.
For a standard entry into the commodities space, Mr. Kofman recommends iShares S&P/TSX Global Gold Index ETF XGD-T and iShares S&P/TSX Global Base Metals Index ETF XBM-T to gain exposure to precious and base metals. In the case of battery metals, Mr. Kofman notes three ETFs investors may want to consider: VanEck Rare Earth/Strategic Metals ETF REMX-A, Global X Lithium & Battery Tech ETF LIT-A and Amplify Lithium & Battery Technology ETF BATT-A.
For those looking to invest in stocks of commodity-based corporations, Ms. Shipley-Strickland’s advice is to read up on them – understand how these companies work and how they make their money. “A lot of people jump on a trend or company without knowing the background.” Mr. Kofman agrees, noting that researching corporate management’s industry experience is particularly important. He singles out Wesdome Gold Mines Ltd., First Quantum Minerals Ltd. and Champion Iron Ltd. as metals and mining companies with strong operating track records, experienced management teams and high-quality asset portfolios with long-term growth potential. In the mining sector, beginners may want to prioritize investing in established operators before companies that operate in the exploration and development phase, he says.
Perhaps surprisingly, even oil and gas companies are seeing an uptick in interest from young retail investors, for two reasons. First, the oil price crash in March, 2020, sparked interest from more risk-tolerant investors intrigued by fluctuations. Second, investors want to see how energy companies evolve as they make large investments in research and development in a bid to move away from fossil fuels.
Sustainability plays into an increased interest in other commodity types, too. Ms. Shipley-Strickland says she’s been hearing a lot more recently from clients wanting to invest in agricultural commodities. Excitement about sustainability and innovations in food products could be driving the increased interest, but guidance about this sector for personal investors is less developed, she notes.
In general, Ms. Shipley-Strickland is preparing to field more questions from investors with a range of risk tolerances looking to get more commodities into their portfolio. “It’s not a huge segment of portfolios right now, but we’re starting to talk about it and see clients interested in it – it could be the tip of the iceberg.”
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.