ETF: Commodity ETFs in your portfolio

In ETF Blog, Latest by Kristia van Heerden

Commodities tend to give investors a sense of security. Gold is especially popular during political and economical turmoil as the current COVID rally is making abundantly clear. The presence of a tangible asset at the other end of the transaction is comforting to those who are at all times geared for the apocalypse.

While it’s very possible to invest in physical commodities, storing large supplies of rhodium in your home is probably a security risk. In the South African market, we have a number of ETFs that invest in physical commodities. While it might be difficult to gain access to your platinum supply when the zombies rise, these ETFs offer opportunities to make money on currency and commodity price movements.

Below is a list of all the commodity ETFs available to South African investors, as well as the cost (TER) and a downloadable fact sheet on each. It’s important to remember that these ETFs are backed by physical assets. For every share you buy, a fractional amount (usually 1/100th of a troy ounce) of the physical asset is bought and stored. The cost of that transaction is priced in. Remember you can’t buy commodity ETFs in your tax-free investment account.

If you are dead set on commodities but unwilling to buy anything outside of the tax-free space, your next best option is investing in the companies that mine and produce the commodities. ETFs like the Satrix RESI track an index of companies that produce commodities – think gold mines. These ETFs are available as tax-free investments, but oddly introduce a degree of management risk you wouldn’t face had you bought metals pure and true. 

Regardless of which direction you choose, remember introducing a single commodity or even an ETF that invests in companies that produce commodities adds concentration risk to your portfolio. Galileo Capital’s Warren Ingram is of the opinion that commodities should play a limited role in any balanced portfolio. “I would not allow commodities to be worth more than 10% of a balanced portfolio. Ideally commodities are good for hedging investors against serious risks in financial markets e.g. stock market collapse and as a hedge against spiralling inflation.”

Despite the sense of security commodities can provide during turbulent times, Ingram is weary of the cyclical nature of the investment – especially considering the cost of holding them. “When commodities are not performing well, there is no income from the asset, only costs. You could find long periods where your commodity investment only loses value or drifts sideways.”

Considering the incredible performance we’ve seen in commodities lately, beware the recency bias. Introducing a single commodity to your portfolio will impact both the performance and cost of your portfolio. A well thought-out, term-appropriate investment strategy is not subject to the short-term performance of the market.

 

ETF TER Fact sheet
1nvest Gold ETF 0.25% 1nvest Gold Fact Sheet
1nvest Palladium ETF 0.35% 1nvest Palladium Fact Sheet
1nvest Platinum ETF 0.30% 1nvest Platinum Fact Sheet
1nvest Rhodium ETF 0.75% 1nvest Rhodium Fact Sheet
Absa NewGold ETF 0.30% Absa NewGold Fact Sheet
Absa NewPalladium ETF 0.40% Absa NewPalladium Fact Sheet
Absa NewPlat ETF 0.40% Absa NewPlat Fact Sheet
FirstRand Krugerrand Custodial Certificates 0.35% KCC Fact Sheet

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