Investors can help reduce risk, hedge against inflation, and diversify their portfolio by investing in commodities. Commodities, such as gold, have been considered alternative investments that are great for portfolio diversification and hedging against inflation. While commodities behave differently from stocks and bonds, the availability of commodity exchange-traded funds (ETFs) makes it easy for investors to invest in them.
You can invest in commodities in several different ways, including by purchasing physical goods like gold or by purchasing ETFs that track the performance of a specific commodity or a basket of commodities. Investing in physical goods requires storage and safekeeping, making it a less convenient option for many investors. On the other hand, ETFs offer a more accessible and cost-effective way to gain exposure to commodities.
Commodities prices rise hand-in-hand with inflation, making a commodities ETF a great way to hedge against inflation risk. When inflation increases, the value of commodities tends to rise, providing investors with a potential source of protection against the eroding purchasing power of their investments. By allocating a portion of their portfolio to commodities, investors can potentially mitigate the negative impact of inflation on their overall investment returns.