Funds to profit from rising or falling commodity prices

If there is one area that divides opinion more than most it is commodities. Some investors think that we are entering a new bull market and that now is the perfect time to buy, whereas others are sceptical and remain bearish.

Whatever your view there is no doubt that it has been a difficult time for the sector. The prolonged fallout from the global financial crisis coupled with the reduction in demand from China and a glut of supply has undermined the prices of many different natural resources.

Over the five years to the end of October the Bloomberg Commodity Index, which includes energy, agriculture, and livestock, as well as precious and industrial metals, was down 39%, but it seems to have bottomed out in the last couple of years.


Businesses operating in the sector have had to cut costs, reduce their capital expenditure, sell off assets, pay down debt and strengthen their balance sheets in order just to survive. Those that are still with us are stronger and more shareholder friendly as a result.

Olivia Markham, the co-manager of BlackRock World Mining (LON:BRWM), one of the largest investment trusts operating in this area, believes that the improvement in global growth over the last few years has created a good environment for commodities. She thinks that the sector is entering a cyclical recovery and points out that companies are generating record cash flows that are being used to increase dividends and strengthen balance sheets.

The fund is markedly overweight in copper miners as demand is expected to outstrip supply over the next few years. Markham also anticipates that the growth in electric cars will result in higher demand for commodities such as lithium, cobalt, nickel and manganese.

Shares in BRWM have returned a loss of 16% over the last five years but they are yielding 3% and trading on a 10% discount to NAV. Over the last year they are up 26%.

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If you have a view on a specific commodity you might prefer an investment trust with a narrower mandate. Examples include Riverstone Energy (LON:RSE), which provides exposure to a concentrated portfolio of oil producers operating in low cost basins like the Gulf of Mexico, and Geiger Counter (LON:GCL), which concentrates on companies involved in the uranium industry that support the generation of nuclear power.

Another option would be the commodity related ETFs available from ETF Securities. The best known is ETFS Physical Gold (LON:PHAU), which is a great choice for bearish investors and those who want to protect themselves against inflation, but there is also a whole range of other similar ETFs linked to everything from cocoa to cattle and sugar to silver.

More experienced investors who are bearish about the commodity markets might want to use one of the company’s short ETFs. These are designed to generate a 1% gain before costs and fees for each 1% daily fall in the associated commodity futures contracts. There are diversified options such as ETFS 1x Daily Short All Commodities (LON:SALL), as well as shorts linked to the sub-sectors like energy as well as individual commodity prices.