Buying the Physical Good
It requires handling delivery and storage of the commodity. Not practical for most investors.
Comparing to buying commodities directly, this approach offers the following advantages:
Mutual funds can invest in stocks of companies involved in commodity-related industries, such as energy, agriculture or mining.
Advantages: professional money management, diversification, and liquidity.
Disadvantages: management fees; not a pure play on commodity prices.
Commodity Future Indexes
A commodity futures contract is an agreement to buy or sell, in the future, a specific quantity of a commodity at a specific price. Participants can choose to close out their positions before the contract is due and never take actual delivery of the commodity itself.
A. highly correlated with.
Stocks reflect other price-relevant factors.
A. delivery of the commodity at maturity.
A typical participant will buy or sell the same amount of contracts before maturity in order to settle with the counterparty.
A. Commodity stocks.
Commodity futures are directly based on commodity future prices.