CFTC warns consumers about funds backed by commodities
The Commodity Futures Trading Commission warned people making investment decisions during the COVID-19 pandemic about the risks associated with trading vehicles that use futures contracts or other commodity interests.
“The CFTC has observed that recent market volatility due to the pandemic has prompted many investors to purchase shares of trading vehicles that use futures contracts or other commodity interests, either in hopes of profiting from a recovery in particular commodity prices or as a means of diversifying their portfolios,” the commission said in a news release.
“These trading vehicles may be organized as exchange-traded products (ETPs) or mutual funds, but that does not necessarily mean they will behave like traditional exchange-traded funds (ETFs) or mutual funds that invest in stocks, bonds or other asset classes. For example, these vehicles might not provide investors opportunities to ‘buy the dip’ or profit from long-term price gains in the underlying commodity.”
“Now more than ever, it is important for Main Street investors to understand how our futures markets work when they go to evaluate their investment choices,” said Joshua Sterling, director of CFTC’s Division of Swap Dealer and Intermediary Oversight.
“This advisory highlights important characteristics of retail commodity pools, in service of the CFTC’s core value of providing clarity to market participants.”
The advisory warns that for energy commodities and associated futures contracts, risks are often related to supply and storage availability, and that for agricultural commodities and associated futures contracts, such as corn, soybeans, or wheat, the risks are often weather-related.
Meanwhile, metals such as gold, copper, and palladium and their futures contracts are affected generally by industrial and macroeconomic factors, the CFTC said.
“Whether the pool you plan to invest in focuses on a single commodity or a broad mix of commodities, you should research the risks associated with the commodities and the industries that utilize them. You should know what conditions could influence their prices and actively monitor those conditions while you participate in the fund.” ❖