How to invest in commodities in Singapore?

Most Singaporeans are not familiar with investing in commodities.  They either invest in equities in SGX or choose to invest their money in properties.  The only commodity they are interested is perhaps only gold.

Nonetheless if one was to look at everything around him, everything is linked to commodities.  During your meals, your food of rice is linked to commodities.  The laptop or PC you are using to view this website is made up of metals and other minerals to power the technology.  The transport you take is linked to oil.  The shirt you wear is linked to cotton (yes, there is a cotton futures market!).  

If you see as much opportunities as the authors do, then perhaps you should consider investing in commodities.

Here are some ways you can do it:

1) Investing in Commodities direct

A simple and direct exposure to commodities would be to trade the commodity itself, either physical or futures.

Holding physical commodities doesn't make much sense to retail investors as it involves financing cost, storage cost, and insurance cost. Thus, most retail investors would rather open a futures account and trade via a brokerage house. One such brokerage house i would recommend would be Ong First Tradition (http://www.ongfirst.com/english/). Account opening is simple, except that it requires a SGD 10,000 min deposit with the house.

Non-Ferrous metals are basically base metals futures contract that are commonly traded in London Metal Exchange (LME). They includes Copper, Aluminium, Lead, Zinc, Nickel, and Tin. Since LME is a physical-back exchange, futures contracts should be closed out before expiration. Otherwise, long holders will have to take physical delivery of the commodity from LME warehouses and short holders will have to make physical delivery to LME warehouses.

Commodity               Tonnage per lot            Margin per Ton            Amount per Lot
Copper                     25mt                            $630                            $15,750
Aluminium                 25mt                            $155                            $3,875
Lead                         25mt                            $225                            $5,625
Zinc                          25mt                            $240                            $6,000
Nickel                       6mt                              $2,400                         $14,400
Tin                            5mt                              $2,100                         $10,500

To better understand what they means, see below example taking Copper price at $9500:
Contractual value per lot = $9500 X 25mt = $237,500
Margin required per lot = 25mt X $630 = $15,750

Hence, a key risk of trading futures is that your margin would be wipe out the moment Copper goes $630 or 6.6% against you. Margin rates are adjusted as and when the Exchange deem necessary, so do check out http://www.lchclearnet.com/risk_management/ltd/margin_rate_circulars/lme/default.asp for the latest margin rate.

2) Investing in related ETFS/Indexes

ETFs, as you probably know, are similar to index mutual funds. They track the performance of a specified index, for instance, the Standard & Poor's 500 ($INX). However, ETFs trade like stocks. There is no minimum investment, and you can trade them as often as you like. 

Commodity ETFs usually track indexes reflecting futures prices. For gold and silver, ETFs actually track the prices of the metals. But the ETF shares do not trade at the commodity prices. For example, a crude-oil ETF doesn't trade at the same price as a barrel of oil. Instead, it trades at a specified fraction of the barrel price. 

Nevertheless, ETF prices move by almost the same percentage as the commodity. For instance, if oil prices move up 10%, so would corresponding ETFs.

ETFs have expenses that keep them from fully replicating the commodity returns. For instance, a 1% expense ratio would subtract 1% from an ETF's annual return. Because most EFT expense ratios run below 1%, that's usually not a concern.

There are many ETFs for commodities and they are mostly based in the US.  For those based in the SGX, they are:

1) GLD 10US$ SPDR GOLD SHARES, 

Website:http://www.spdrgoldshares.com/sites/sg/

2) Lyxor CRBNonEny10US$ LYXOR COMMODITIES CRB NONENERGY

Lyxor ETF Commodities CRB Non Energy is an exchange-traded fund incorporated in France. The Fund's objective is to give exposure to the international commodities markets by providing investment results that closely correspond to the performance of Reuters/Jefferies CRB NON-ENERGY index.  Link.

3) Lyxor Cmdty 10US$ LYXOR COMMODITIES CRB FUND

Lyxor ETF Commodities CRB is an exchange-traded fund incorporated in France. The Fund's objective is to give exposure to the international commodities markets by providing investment results that closely correspond to the performance of Reuters/Jefferies CRB index.  Link.

3) Unit Trusts/ Mutual Funds that invest in Commodities

When you invest in a mutual fund/unit trust, you're pooling your money with money from other people who share the same investment goals. You own shares in the mutual fund/unit trust. The pool of money is then invested by professional investment managers, who choose various financial products they believe will help achieve the fund's financial objectives.  Though some people argue that Unit Trusts are different from Mutual Funds, we shall just for illustration purposes place them together in this category since much of their principles are similar.  If you are interested to know more about the differences, you can easily get them online through google.

 

With credit from Moneytalk, this link below shows the difference between investing in ETFs and Unit Trusts:

http://www.moneytalk.sg/2008/12/sti-etf-vs-unit-trust.html

A search through fundsupermart showed the various Unit Trusts/Mutual funds that invest in commodities:

BNP Paribas Agriculture (SGD) Fund

DB Platinum Commodity RIC-C SGD Hedged

 Schroder AS Commo EUR A Acc 

Schroder AS Commo USD A Acc

 Schroder AS Commodity Fd SGD A Acc

Schroder AS Gold&Metals A Acc SGD

United Commodities Plus Fd SGD

4) Investing in Equities of Companies that deal with Commodities

You can invest in equities in companies that deal with commodities.  In SGX, there are Olam International, Noble Group, Wilmar International and Golden Agri-Resources.  Please take note that when investing in companies rather than commodities direct, there is a always a human factor risk.  Enron is a classic case of bad and corrupt management.  

Thus when investing in equities of companies that deal with commodities, there is a need to look further than the commodities themselves.  This includes looking into the management's track record, business model, balance sheet, cash flow etc.

5) Investing in Countries that deal with Commodities

One country that comes to mind is Australia.  Australia equity markets continue to rise, backed by the rise of commodities in Australia's rich resources.  Investing in the Index Fund of Australia would no doubt give you the benefits to ride on Australia's commodities wave.

However, please take note that a country's Index Fund also consists of other non-commodity equities.  If you really want to just invest in commodities alone, this option may not be viable.

Again, the human factor risk also comes into play here when investing in a country's Index Fund.  Commodities may be booming but if there is political instability in the government, this will of course hurt the market as well.