Are you investing in the right thing?
When investors, analysts, and prognosticators talk about their market views, they often reference the underlying "good" that is produced.
For example, they tell you that if you are bullish on the outlook of handheld technology, you could express that in Apple. Have a view on electric cars? Perhaps Tesla could be of use. Think that you know where the stock market is headed directionally? An index ETF representing an overall stock market may make sense.
However, where this falters is when one has a view on a commodity. Too often we hear views on the price of oil, gas, and gold expressed by taking a position in a corporation's stock that produces the commodity. This is a very dirty way to express the opinion.
Why?
There are countless examples of commodities rising or remaining stable while a stock falls.
The reality is that the performance of a commodity producing company is affected by many outside factors that could significantly impact their stock price. These include overall stock market correlation (beta), production costs, hedging policies and practices, organizational structure and competence, debt/equity financing, land positions – the list goes on.
Yet, what affects the price of a commodity future or ETF? Only the commodity itself. Supply and demand in addition to technical elements of momentum and volatility play into this, but there are no other extraneous factors.
So what does this all mean?
If you have a view on the quality of a management team or the land holdings of an oil company coupled with a view on the direction of the stock market as a whole, invest in the company’s equity.
If you have a view on a commodity, find an instrument to express that view directly and cleanly. We recommend commodity-based ETFs, the easiest and most effective way for investors to express a “pure play” opinion in commodities. If it is a view on oil or natural gas produced in Canada, the largest foreign supplier to the United States, pick an ETF that exposes you to Canadian Oil or Gas – the commodity.