You are right in recognizing there are different ways to go about investing in hard-asset commodities such as energy, metals, agriculture, livestock and meat, and in currencies, sometimes considered a commodity.

The answer to your question depends upon what your objectives are for making the investment and how much money you have to invest.  Then, you and your wealth manager need to find which commodities-investment strategy and risk/return profile make the most sense for you.

Two good reasons for an allocation to commodities are diversification and the potential to add to the total return of your core investment portfolio.  Historically, commodities have had a low correlation to stocks and bonds.  Also, they can offer a potential hedge against inflation and “event-risk” situations such as geopolitical turmoil.

DIFFERENT OBJECTIVES, DIFFERENT WAYS

Not all product strategies are the same.  Generally speaking, passive commodities-investing strategies aim to invest for the beta, giving exposure that roughly tracks the ebb and flow of the commodities markets, while active strategies invest for alpha, aiming to generate above-market returns.

ETFs and index mutual funds can offer passive exposure to commodities markets, as can some mutual funds; but be aware that these vehicles emulate an approximation of only one or another particular index.  They are not the same thing as the benchmark index they attempt to emulate.  So, rather than contain the actual holdings that comprise an index, they instead hold futures, options and possibly derivatives whose characteristics approximately emulate the desired benchmark.

Some investors may allocate to companies that mine, drill for or harvest commodities, or are involved in the transmission or distribution of commodities, but equity holdings are not a commodities pure play.

Commodities themselves, however, are traded as futures. So, the typical investor does not take physical delivery of the commodity itself; instead, the individual looks to make money through the changes in the commodity’s value over time.  But do not try this at home.  Invest with a professional.

THE GREATER YOUR WEALTH, THE GREATER YOUR OPTIONS

Both managed account and hedge fund vehicles are available to accredited investors whose strategies will trade commodities futures and may even take physical delivery of commodities.  As with all money managers and strategies, you need to conduct due diligence on the CTA (commodity trading advisor registered with the Commodity Futures Trading Commission) or the hedge fund in which you may consider investing.

In the world of actively managed commodities trading and hedge fund commodities investing, you will find two main approaches employed. One is directional investing with individual long-only and short-only holdings.  The other is paired trade investing in which the manager seeks to take advantage of a price difference between markets or instruments.

Learn the manager’s investment approach and analyze the characteristics of the fund because these differ from firm to firm.  For example, some managers aim to mute volatility while others are comfortable with it.  How about you? If you are not comfortable with how one manager invests, and the characteristics of how the portfolio performs, then keep looking for a manager whose process you are comfortable with.