Before going on to state the need for Commodity ETF in India and how investors can benefit from it I would like to explain what an ETF would mean.
Meaning of ETF:
ETF or Exchange Traded Funds are like Mutual Funds which can be traded on the stock exchanges. We have heard of the Gold ETF and it typically means a fund which invests only in Gold.
So if a person wants to invest in gold he/she has the option of buying physical gold and keeping it. But that has got some security concerns. So the second option is to invest in a Gold ETF. Its as good as buying gold. The only difference is that here gold is bought for you and stores in Demat form.
I believe that the concept of ETF is clear now to everyone. Hence I would go on to explain what would be a commodity ETF and why investors could benefit from investing in a commodity ETF.
What Would be a Commodity ETF:
Well Gold would also be a commodity ETF. But the problem is that in India we only have the Gold ETF which of course is a precious metal. There is no other ETF at present in India.
Globally there are ETF's of almost all metals and also agro- commodities. Example: Gold, silver, copper, wheat, corn, cotton etc.
So a commodity ETF would typically be one throught which a person can get exposure to wide range of industrial and agri commodities.
Why Commodity ETF is good for Investors:
To get the highest return in commodity investing the best idea is to buy the commodity. For Example buying Gold, Silver, Copper, Zinc or any other agricultural commodity. But this is not feisable for a common investor.
So the next best option is to invest in commodity ETF. This as stated earlier is the indirect way of owning the commodity.
I would put investment in commodity related stocks as the third option for investing in commodities. Of course in India since the first option is not feisable for most investors and there is no commodity ETF also this is the only option.
Investing in commodity stocks is the last option because while investing in equities one would surely not get the full benefit of the commodity price increase. Also while investing in equities many other things have to be considered such as the management of the company, financial health etc.
Why Buy Commodities Now:
In my opinion the next year and even now is one of the best times to buy all types of commodities. I dont expect them to do exceedingly well in the next year or maybe in the next few years. But any sensible person would buy a stock or commodity when its down. For commodities the prices have plunged and in some cases they are down more then they should have gone down. So for someone who is looking at a 3-5 year investment horizon the industrial commodities might be one to pick up now.
Even crude oil at $45 is very cheap. Analyst are tlking about crude at $25. But that would mean that the US is contracting at something like 5-10%. This makes no sense. Similarly the long term outlook for all commodities is very bright.
The Commodity Price Cycle:
Prices go up in a period of high growth in the global economy like it was from 2003 to early 2008.
When there is a slowdown or recession the prices also slump. This is what has happened now. When prices fall the commodity producers have less incentive to go for expansion, go for exploration activities and some even shut down few plants and cut down on capital expenditure big time.
So as long as growth is slow or negative this is fine from the demand-supply perspective. But one day the world will get back to decent growth again and this is more true for Asian countries.
When this happens suddenly there is a big pick up in demand for industrial commodites. But the commodity producers have long back cut on their exploration, capital expenditure and other such growth activities. So suddenly there is a demand- supply mismatch. There is more demand again for industrial commodities then the supply.
It is this time when the prices would shoot up again. This is how the commodity cycle generally works and this is what will happen in the next few years. I cant predict the timeline but the global economy will recover some day and then the commodities would shoot up again.
So What Should One Do:
Commodity ETF might not come so soon in India. So for now the best option is to invest in industrial commodity stocks. I would not suggest investment in the current Sensex levels. I personally expect the Sensex to go back well below the October 2008 lows. So that would be the best time to invest in some of the good commodity stocks.
Meaning of ETF:
ETF or Exchange Traded Funds are like Mutual Funds which can be traded on the stock exchanges. We have heard of the Gold ETF and it typically means a fund which invests only in Gold.
So if a person wants to invest in gold he/she has the option of buying physical gold and keeping it. But that has got some security concerns. So the second option is to invest in a Gold ETF. Its as good as buying gold. The only difference is that here gold is bought for you and stores in Demat form.
I believe that the concept of ETF is clear now to everyone. Hence I would go on to explain what would be a commodity ETF and why investors could benefit from investing in a commodity ETF.
What Would be a Commodity ETF:
Well Gold would also be a commodity ETF. But the problem is that in India we only have the Gold ETF which of course is a precious metal. There is no other ETF at present in India.
Globally there are ETF's of almost all metals and also agro- commodities. Example: Gold, silver, copper, wheat, corn, cotton etc.
So a commodity ETF would typically be one throught which a person can get exposure to wide range of industrial and agri commodities.
Why Commodity ETF is good for Investors:
To get the highest return in commodity investing the best idea is to buy the commodity. For Example buying Gold, Silver, Copper, Zinc or any other agricultural commodity. But this is not feisable for a common investor.
So the next best option is to invest in commodity ETF. This as stated earlier is the indirect way of owning the commodity.
I would put investment in commodity related stocks as the third option for investing in commodities. Of course in India since the first option is not feisable for most investors and there is no commodity ETF also this is the only option.
Investing in commodity stocks is the last option because while investing in equities one would surely not get the full benefit of the commodity price increase. Also while investing in equities many other things have to be considered such as the management of the company, financial health etc.
Why Buy Commodities Now:
In my opinion the next year and even now is one of the best times to buy all types of commodities. I dont expect them to do exceedingly well in the next year or maybe in the next few years. But any sensible person would buy a stock or commodity when its down. For commodities the prices have plunged and in some cases they are down more then they should have gone down. So for someone who is looking at a 3-5 year investment horizon the industrial commodities might be one to pick up now.
Even crude oil at $45 is very cheap. Analyst are tlking about crude at $25. But that would mean that the US is contracting at something like 5-10%. This makes no sense. Similarly the long term outlook for all commodities is very bright.
The Commodity Price Cycle:
Prices go up in a period of high growth in the global economy like it was from 2003 to early 2008.
When there is a slowdown or recession the prices also slump. This is what has happened now. When prices fall the commodity producers have less incentive to go for expansion, go for exploration activities and some even shut down few plants and cut down on capital expenditure big time.
So as long as growth is slow or negative this is fine from the demand-supply perspective. But one day the world will get back to decent growth again and this is more true for Asian countries.
When this happens suddenly there is a big pick up in demand for industrial commodites. But the commodity producers have long back cut on their exploration, capital expenditure and other such growth activities. So suddenly there is a demand- supply mismatch. There is more demand again for industrial commodities then the supply.
It is this time when the prices would shoot up again. This is how the commodity cycle generally works and this is what will happen in the next few years. I cant predict the timeline but the global economy will recover some day and then the commodities would shoot up again.
So What Should One Do:
Commodity ETF might not come so soon in India. So for now the best option is to invest in industrial commodity stocks. I would not suggest investment in the current Sensex levels. I personally expect the Sensex to go back well below the October 2008 lows. So that would be the best time to invest in some of the good commodity stocks.
No comments:
Post a Comment