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All About Alts

What is commodities investing?

August 18th, 2023 By Emily Norwood

Commodities can be an integral part of an alternative asset investment strategy. They provide investors with the opportunity to benefit from price changes in vital raw materials used across industries, and investing in commodities can be an effective approach for investors looking to diversify their portfolios. But even though commodities have the potential to generate significant returns, if not properly managed, they can also carry a degree of risk.

In this article, we’ll explain how investing in commodities works, focusing on strategies that could help you capitalize on market opportunities while mitigating your exposure to risk.

What are commodities?

The word “commodities” refers to the most basic goods; i.e., any raw material that can be used to make other goods is considered a commodity, and the majority are natural resources. Some examples of commodities include:

  • Metals (copper, platinum, etc.)
  • Cotton
  • Coal
  • Oil and natural gas
  • Wheat 
  • Sugar
  • Rubber
  • Soybeans
  • Livestock
  • Lumber

Commodities are a critical part of the global economy and have been for centuries. The earliest form of commodities trading has been traced back as far as 3800 B.C. There is evidence of rice futures trading occurring in 17th-century Japan, while commodities futures trading in the United States officially started much later, in the mid- to late 1800s.

How does commodities investing work?

There are several ways to invest in commodities. The simplest is to purchase a quantity of physical raw materials, like gold or silver bullion, although this method is less practical with agricultural products and other commodities that require specialized storage, like oil and gas. For investors who want a less hands-on approach, buying commodities stocks or allocating capital to a commodities-focused mutual fund can also increase a portfolio’s exposure to this asset class.

Commodities investing can also be done through futures contracts or exchange-traded products (ETPs) that track commodity prices. These are fairly complex financial instruments, so let’s take a look at them separately.

Commodities futures

Futures contracts (or simply “futures”) are a financial instrument that consists of a contractual agreement to buy or sell a security or commodity asset on a specific future date for a set price. Commodity futures are traded like stocks on exchanges, where they can be used to hedge or speculate against the future price risk of that commodity.

Commodities ETPs

ETPs are “baskets” of securities that consist of (or are linked to) stocks, bonds, currencies, an index, or other financial instruments – in our case, commodities. Their value is derived from these underlying instruments and they are traded on exchanges, similar to futures and stocks. Most ETPs are passively managed and as such, have very low fees, which makes them highly accessible to retail investors. 

Why invest in commodities?

While commodities can provide investors with an avenue for diversifying their portfolio, the volatility and pricing pressure that comes with these investments must be carefully weighed against any potential rewards. 

Benefits of commodities investing

  • Hedge against inflation: Commodity prices often follow the prices of goods in other sectors of the economy, especially during inflationary periods. This can help mitigate the impact of inflation by retaining or even improving the value of an investment portfolio even when other assets aren’t performing optimally.
  • Inherent value as real assets: Real assets are tangible items that have inherent value and this value leads to equity appreciation over time. As the global population grows, for example, the demand for commodities such as oil, metals, and other natural resources will only continue to rise. This puts investors in a position to leverage these commodities’ value to reinforce their portfolios. 

Challenges of commodities investing

  • Volatile markets: The commodities markets are uniquely and frequently impacted by world events. Because these assets are utilized in every sector of the global economy, their prices are subject to the influence of such factors as adverse weather events, geopolitical unrest, emerging technologies, inflation, and even rumors about the state of the market. As such, investors must be prepared to shoulder this risk.
  • Speculative risks: Commodity investments made via futures and futures-based ETPs are hinged, by definition on time-limited contracts. Investors are locked into a commitment to buy or sell an asset on a set date. The values of these shares are not guaranteed to correlate with the value of the underlying asset – and if the share price falls, investors cannot hold the shares beyond their expiration date in the hope that the value will recover.

Trends in commodities investing

Increased standard of living and population growth

The world’s population is expected to increase by nearly 2 billion people in the next three decades. At the same time, the global standard of living has increased dramatically

people are better educated, staying healthier, and living longer. This growth is expected to generate increased demand for the commodities needed to manufacture necessary products and services, in particular metals and energy-generating goods.

Climate action

The movement to decarbonize power generation and electrify transportation has long-ranging consequences for both the environment and the economy. Investors are increasingly tailoring their portfolios with environmental, social, and corporate governance (ESG) goals in mind. This shift is driving demand for commodities used in carbon reduction ventures and other future-facing industries.

Impact of international events 

From the outset of 2023, geopolitical events have been driving fluctuations in the commodities market. Economic sanctions against Russia in response to the war in Ukraine and China’s post-COVID reopening have dramatically shifted demand across the Asian and European markets, creating a wave of value changes ranging from record highs to more recent slumps.

How commodities compare to franchise investing

Franchise and commodities investing have a similar appeal to investors seeking to optimize their portfolio’s long-term growth. As securities, both are regulated by the U.S. Securities and Exchange Commission (SEC), so investors have the peace of mind that comes with federal oversight. Population growth and trends in ESG investing will likely also prove to be a boon for both markets.

When it comes to direct comparison of risk, however, commodities are much more appropriate for investors with a higher risk threshold. Commodities funds are not diversified, markets can be highly volatile, and the speculative nature of some investment strategies makes commodities a high-risk asset when compared to the relative stability of franchise investing. 

FranShares brings the ease of commodities investing to franchises

Until recently, franchising was a hands-on investment model. Investors had a choice between owning and operating directly, or hiring a management firm to handle the daily operations of their business. 

FranShares brings the passive power of private investing to the franchise model with an actively managed portfolio approach that lets individual investors add this valuable asset class to their asset mix without direct operation or location ownership.

Benefits of investing with FranShares

We combine deep industry expertise with a zero-fee approach to ensure our investors maximize their long-term returns – without the risk of losing their shirts. Our mission is to help investors reap the benefits of franchise investing with a unique business model that offers:

  • Passive income
    Our best-in-class franchise management team ensures that our investors enjoy truly passive income through quarterly distributions – without managing the franchise. In other words, we do the legwork while you sit back and enjoy the returns.
  • Equity appreciation

The value of your franchise investment may increase over time and may provide secure, long-term passive income.

  • Flexible capital commitment
    We offer accredited and non-accredited investors the opportunity to invest for as little as $500, although our model also appeals to ultra-high-net-worth investors. Our platform allows everyday people to become fractional franchise owners with the ability to invest the right amount of capital for their own personal circumstances.
  • Diversification
    Diversify away from the stock market and other publicly traded assets while owning a portfolio of franchises across different geographies and industries, which creates an effective buffer against challenges that may shut down a single franchise or location, such as service franchises closing temporarily during pandemic lockdowns.
  • Low volatility
    Unlike other assets, which may experience considerable fluctuations due to investor sentiment, the growth in value and disbursements from franchise investments are determined over the longer term by the business operations of the franchises.

Ready to add franchise investing to your portfolio?

If you’re an investor who is looking to incorporate alternative assets into your 2023 strategy, investing fractionally with a FranShares franchise portfolio offers high earning potential and diversification in an entirely passive model. 

To learn more about FranShares and this unique opportunity, sign up on our home page.

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