Commodity and Currency Exchange-Traded Funds

Commodity ETFs

Investors can execute long-only, short-only, or long-short commodity strategies using commodity ETFs. Commodity ETFs invest in both commodity futures and physical commodities, and cover individual commodities as well as sectors or diversified baskets. While physical commodities may be a good long-term holding in a portfolio, futures-based, long-commodity ETFs work better as a tactical strategy. This is because the dynamics of futures contract markets (the different levels of speculators and hedgers and the cost of carry) may cause losses on long futures contracts even as the underlying commodity price is increasing.

Currency ETFs

Currency ETFs can invest in short-term government bonds, futures, or forward contracts to gain exposure to a single currency pair or a basket of currencies. These currency ETFs can follow passive or active long-short strategies, such as price momentum (long a rising currency and short a declining currency), valuation (long an overpriced currency and short an underpriced currency), or carry (long a high-yielding currency and short a low-yielding currency). When investing in currencies, a long position in one currency (the Euro, for example) always means a short position in another currency (the U.S. dollar, for example).