Apr
02
2024

What’s the Difference Between REITs and Real Estate Mutual Funds?

By | Growing Wealth, invest, Investing | Comments Off on What’s the Difference Between REITs and Real Estate Mutual Funds?

Real estate investment trusts (REITs) and real estate mutual funds offer exposure to property investments, but in different ways. A REIT is a legal entity that owns and operates income-producing real estate and is required to pay dividends, while a real estate mutual fund is a pooled investment vehicle.

What Is a REIT?

A REIT is a trust that invests in real estate, typically through direct ownership. Those properties generate rental income, which is paid out to REIT shareholders in the form of dividends. The types of properties REITs may own can include:

•   Hotels and resorts

•   Self-storage facilities

•   Warehouses

•   Commercial office space

•   Retail space

•   Apartment buildings

•   Strip malls

Some REITs take a different approach in how they generate returns for investors. Rather than owning income-producing property, they may invest in mortgage loans and mortgage-backed securities. A third category of REITs employs a hybrid strategy, investing in both properties and mortgages.

REITs may be publicly traded on an exchange, similar to a stock, or they may be registered with the SEC but not publicly traded. This second category of REITs can also be referred to as non-traded REITs. Regardless of how they’re classified, REITs are considered alternative investments.

đź’ˇ Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alternative assets through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

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What Is a Real Estate Mutual Fund?

A real estate fund is a type of mutual fund that’s focused on the real estate sector. Mutual funds are pooled investment vehicles that allow multiple investors to buy shares and gain access to underlying investments. What a real estate mutual fund invests in can depend on its objective.

Real estate fund investments may include:

•   REITs

•   Individual properties

•   Mortgages and mortgage-backed securities

A fund manager determines which investments to hold inside the fund. The frequency with which fund assets turn over can depend on whether it uses an active or passive management strategy.

Real estate funds can pay out dividends to investors, though not all of them do. Some real estate funds are exchange-traded funds (ETFs), meaning they have the structure of a mutual fund but trade on an exchange like a stock.

Like most funds, real estate mutual funds have annual fees in the form of expense ratios.

What Are Key Differences Between REITs and Real Estate Mutual Funds

The most significant differences between REITs and real estate funds lie in how they operate, how they generate returns for investors, and how they’re taxed. While both have the same overall goal of leveraging real estate for returns, they don’t approach that goal the same way.

How They’re Structured

REITs are companies that either own and operate income-producing real estate, invest in mortgages and mortgage-backed securities, or a mix of both. To qualify as a REIT, the company must pay out at least 90% of its taxable income annually to investors as dividends.

A real estate fund is structured as a pooled investment vehicle that can hold dozens of different investments. Many real estate funds concentrate holdings on REITs, with some focusing on a specific niche, such as commercial office buildings or shopping centers. Other real estate funds may hold real estate stocks.

Both REITs and real estate funds may be actively or passively managed. With an active management strategy, the fund manager’s goal is to beat the market. Passive management, on the other hand, aims to track the performance of an underlying benchmark. Real estate index funds, for example, may try to match the returns of the Dow Jones U.S. Real Estate Index (DJUSRE).

How They’re Taxed

How a REIT generates its income can determine how dividends paid to investors are treated for tax purposes. In most instances, dividends that result from the collection of rent payments are treated as ordinary income for the investor. If a REIT sells a property at a profit, however, those dividends would be treated as capital gains.
Investors who own REIT shares should receive a Form 1099-DIV each year that breaks down:

•   Dividends from ordinary income

•   Qualified dividends

•   Capital gains

•   Payments for return of capital

Qualified dividends are taxed at the long-term capital gains tax rate. This rate is lower than ordinary income tax rates for certain taxpayers.

Real estate mutual funds can also generate a Form 1099-DIV for investors when there are taxable distributions to report. Investors have to pay tax on income and/or capital gains they receive from the fund, including:

•   Dividends

•   Interest payments

•   Capital gains from the sale of underlying assets

Ordinary dividends are taxed as ordinary income, while qualified dividends qualify for the long-term capital gains tax rate. Interest is also taxed as ordinary income in most cases, while capital gains are subject to the short- or long-term capital gains tax rate, depending on how long the assets were held.

Recommended: How Are Mutual Funds Taxed?

Key Investment Considerations

When debating whether to invest in a REIT vs. mutual fund, it’s important to consider your objectives, risk tolerance, and time horizon. Specifically, you may want to ask yourself the following:

•   Is it more important to collect dividends for passive income or realize gains through capital appreciation?

•   What degree of risk are you comfortable taking?

•   Which real estate sectors are you seeking exposure to?

•   How much capital do you have available to invest in REITs or real estate funds?

•   How long do you plan to hold real estate investments in your portfolio?

It’s also helpful to look at the specifics of individual investments. For instance, if you’re interested in a REIT, you’d want to consider its past performance and typical dividend payout, the types of properties it owns, how the REIT is structured, and the fees you might pay.

With a real estate fund, it’s also important to look at the underlying assets and the fund manager’s strategy. While past performance isn’t a guarantee of future returns, it can give you insight into how the fund has moved in prior years. It’s also wise to check the expense ratio to see what owning the fund might cost.

Are There Similarities Between REITs and Real Estate Mutual Funds?

REITs and real estate funds are similar in two key ways. They’re both pathways to diversifying with real estate and in most cases, they’re highly liquid investments.

If you’re interested in leveraging the benefits of real estate investments in a portfolio but don’t want to own property directly, a REIT or real estate fund can help you accomplish your goal. How wide or narrow the scope of those investments ends up being can depend on the REIT or fund’s overall strategy.

Publicly traded REITs and real estate funds are relatively easy to trade. You just need a brokerage account to buy and sell either one on an exchange. If you were to buy a fix-and-flip property or a rental property, on the other hand, it could be more challenging to unload the investment once you’re ready to exit.

đź’ˇ Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

Risks and Role of Real Estate in Your Portfolio

Real estate investments in general can act as an inflationary hedge in a portfolio. When consumer prices rise, rents tend to move in tandem. Real estate also has a lower correlation overall with the stock market, providing some added insulation against volatility.

However, there are risks involved in real estate investing, either through a REIT or real estate fund. The biggest risk factors include:

•   Declines in property values

•   Fluctuations in interest rates

•   Demand for properties

Liquidity risk can also become an issue for REITs or real estate funds that have low trading volume. Building a diversified portfolio that includes real estate as one small slice can help with managing those risks. Evaluating your risk tolerance can help you decide how much of your portfolio to commit to REITs or real estate funds.

The Takeaway

REITs and real estate funds can play an important role in an investment portfolio if you’re hoping to move beyond stocks and bonds. Familiarizing yourself with how each one works and the potential risks is a good place to start. Once you’ve decided whether to invest in REITs, real estate funds, or both you can take the next step and open a brokerage account to start trading.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Are REITs a good investment?

REITs can be a good investment if the underlying assets perform well and generate consistent dividend income for investors. But there are no guarantees, and the real estate market comes with its own risks. Thus it’s important to consider the tax implications and the potential risks of REIT investing before getting started.

Are real estate funds a good investment?

A real estate fund can be a way to invest in property (or properties) without direct ownership. It’s possible to diversify a portfolio with multiple property types or sectors using only a couple of funds. Investors can benefit from dividends, capital appreciation, or a mix of both. But the real estate market is subject to interest rate risk, fluctuating trends, and more.

What are the risks associated with REITs and real estate funds?

The real estate market may not be influenced by the stock or bond markets, but real estate values can also be volatile, and prices in certain property sectors — or geographic areas — can rise and fall just as suddenly as equities. When investing in real estate directly or indirectly through REITs or real estate funds, be sure to do your due diligence about relevant risk factors.

Can you lose money investing in a REIT or real estate fund?

Yes, it’s possible to lose money in any type of investment, including real estate-related instruments like REITs and real estate mutual funds and ETFs. The underlying properties are not guaranteed to provide investors with a profit, so it’s important to understand what you’re investing in before you do so.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
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An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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Apr
02
2024

Private Equity vs Venture Capital

By | Growing Wealth, invest, Investing | Comments Off on Private Equity vs Venture Capital

Venture capital and private equity funds are two different ways that companies, funds or individuals invest in other companies. While the two types of funds share some similarities, there are also key differences that you’ll want to be aware of. While many private equity and venture capital funds are privately held, some are open to individual investors.

A private equity fund might use its managerial, technological or other expertise to invest in one specific company, hoping to turn it around and improve its profitability. That would allow the fund to sell their investment for a healthy return. Venture capital firms often invest in early-stage companies or startups. They provide capital funds to these companies in exchange for a portion of the company’s equity.

Key Points

•   Private equity and venture capital are two ways that people, funds or companies invest in other companies.

•   Private equity funds often invest in a small number or even just one company at a time, usually a mature company.

•   Venture capital funds generally invest in many different companies that are early in their journey to profitability.

•   While many private equity and venture capital funds are privately held, there are some that are publicly traded and open to individual investors.

What Is Private Equity?

Private equity refers to investing in companies that are not publicly traded. Unlike investing in public equities (such as by purchasing index funds or shares of stock of companies listed on a public stock exchange), private equity investors put their money into privately-held companies.

While you might not think of private companies as having shares of stock in the same way that publicly-traded companies do, most incorporated companies do have shares of stock. A small company might only have a hundred or even less shares, all owned by the initial founders of the company.

A private company that is more established, on the other hand, might have hundreds of thousands or even millions of shares owned by a wide variety of people. The stock of private companies might be owned by the founders, employees or other private equity investors.

đź’ˇ Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alternative funds through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

What Is Venture Capital?

Venture capital refers to investors and money that is invested into early-stage companies in the hope that they will generate an above-average return on investment. Venture capital investing usually refers to funds or individuals that give money to early-stage companies, but the investment can also be via managerial or technical expertise.

Venture capital money is often invested over a series of “rounds.” Initially there might be an “angel” round or “seed” round, and then Series A, B, C and so on. In each round, companies receive funding from venture capital investors in exchange for a percentage of the company’s stock, at an agreed-upon valuation.

Generally, the earlier the round of venture capital investment, the lower the valuation. This allows the earliest investors to potentially have the highest return on investment, since they also carry the largest amount of risk.

Venture capital and private equity may serve as examples of alternative investments for certain investors.

Key Differences Between Private Equity and Venture Capital

While private equity and venture capital both refer to companies or funds that invest in companies, there are a few key differences that you’ll want to be aware of:

Private Equity Venture Capital
Generally invests in already established companies Often invests in early-stage companies and/or startups
Often purchase entire companies and work to improve their profitability Purchase a portion of the companies they invest in
Generally invest more money and focus on fewer companies Firms tend to spread their money around — investing relatively fewer amounts of money in more investments

Advantages and Disadvantages

When you compare private equity vs. venture capital investing, there are a few similarities as well as advantages or disadvantages to investing in both.

In most cases, comparing the advantages and disadvantages of venture capital vs. private equity depends on your own specific situation or goal. What might be an advantage for one investor could be a disadvantage for an investor with a different risk tolerance or financial profile.

One potential advantage of investing in private equity is that private equity firms often concentrate their money in a small number of firms. This might allow the private equity investors to concentrate their expertise into improving the profitability of those companies. However, some might consider this a disadvantage, since you might lose some or most of your investment if the company is not able to turn things around.

Similarly, venture capital investors typically invest in a number of startups and early-stage companies. One advantage of investing in this manner is that you may see outsized returns if the company succeeds. However, a related disadvantage is that many companies in these early stages do not succeed, potentially wiping out your entire investment.

In that sense, it’s a high-risk, high-potentialy-reward area of investment.

Common Misconceptions

One common misconception about private equity vs. venture capital is that only investors with significant net worth can invest in these fields. While it is true that most actual private equity and venture capital investors are those with access to significant amounts of capital, there are also many private equity or venture capital funds that sell shares of the funds themselves to retail investors.

This may allow even regular individual investors to take part in investing in venture capital or private equity.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

The Takeaway

Private equity and venture capital funds are two different ways that companies invest in other companies. While they share a lot of similarities, there are also some key differences. One big difference is that generally, private equity funds invest more money in fewer companies while venture capital funds often invest (relatively) smaller sums of money in many companies.

While most private equity and venture capital funds are privately held, there are some that are publicly traded and open to individual investors.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Is private equity better than venture capital?

Private equity (PE) and venture capital (VC) are two forms of investing in other companies, and when comparing the difference between VC and PE, it isn’t really the case that one is better than the other. Instead, it will depend on your own specific financial situation and/or risk tolerance. You can also consider alternative investments to both private equity and venture capital.

Which is the riskier option?

Both private equity and venture capital carry some level of risk. In one manner of speaking, venture capital is riskier, since many of the early-stage companies that they invest in will not succeed. However, most venture capital funds mitigate that risk by investing in many different companies. One successful investment may pay off the losses of tens or even hundreds of unsuccessful venture capital investments.

Are there private equity or venture capital funds available to buy?

Many private equity and venture capital firms are targeted towards investors with significant assets and/or a high net worth. However, there are some funds that are publicly traded and thus available to individual investors. Make sure that you do your own research before investing in any one particular private equity or venture capital fund.

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SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Apr
02
2024

What Is Private Credit?

By | Growing Wealth, invest, Investing | Comments Off on What Is Private Credit?

Private credit refers to lending from non-bank financial institutions. Also referred to as direct lending, private credit allows borrowers (typically smaller to mid-sized businesses) to seek financing through avenues other than a standard bank loan.

This type of arrangement can remove barriers to funding for businesses while creating opportunities for investors, as a type of alternative investment. Private credit funds allow institutional and individual investors to pool capital that is used to extend loans and generate returns through interest on those loans.

What Are the Different Types of Private Credit?

Private credit investments can adhere to various investment strategies, each offering a different level of risk and rewards. Within a capital structure, certain types of private credit take precedence over others regarding the order in which they’re repaid.

Senior Lending

In a senior lending arrangement, secured loans are made directly to non-publicly traded, middle-market companies. These loans sit at the top of the capital structure or stack and assume priority status for repayment should the borrowing company file for bankruptcy protection.

Senior debt tends to have lower interest rates than other types of private credit arrangements since the loan is secured by business collateral. That means returns may also be lower, but the preferred repayment status reduces credit risk for investors.

Should the borrowing company fail, senior loans would hold an initial claim on the business’s assets. Those may include cash reserves, equipment and property, real estate, and inventory. That significantly reduces the risk of investors losing their entire investment in the event of bankruptcy.

Junior Debt

Junior or subordinated debt is debt that follows behind senior lending obligations in the capital stack. Loans are made directly to businesses with rates that are typically higher than those assigned to senior debt. Junior debt is most often unsecured though lenders can impose second lien requirements on business assets.

Investors may generate stronger returns from junior debt, but the risk is correspondingly higher. Should the borrowing business go bankrupt, junior debts would only be repaid once senior financing obligations have been satisfied.

Mezzanine Debt

Mezzanine debt is a private credit term that’s often used interchangeably with junior debt, but it has a slightly different meaning. In mezzanine lending, the lender may have the option to convert debt to equity if the company defaults on repayment. There may be some collateral offered but lenders also consider current and future cash flows when making credit decisions.

Compared to junior or senior debt, mezzanine debt is riskier but it has the potential to produce higher yields for investors as the interest rates are usually higher. The risk to borrowers is that if the company defaults, they’ll be forced to give up an ownership share in the business.

Distressed Credit

Distressed credit is extended to companies that are experiencing financial or operational stress and may be unable to obtain financing elsewhere. The obvious benefit to investors is the possibility of earning much higher returns since this type of private credit generally carries higher rates. However, that’s balanced by a greater degree of risk.

Risk may be mitigated if the company can effectively utilize private credit capital to restructure and stabilize cash flow. Should the company eventually file for bankruptcy protection, distressed debt investors would take precedence over equity holders for repayment.

Special Financing

Specialty financing refers to lending that serves a specific purpose and doesn’t fit within the confines of traditional bank lending. This type of private credit is also referred to as asset-based financing since lending arrangements typically involve the acquisition of an asset that is used as collateral for the loan.

Equipment financing is one example. Say that a construction business needs to purchase a new backhoe. They could get an equipment loan to buy what they need, using the backhoe they’re purchasing to secure it.

đź’ˇ Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alt funds through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Potential Benefits of Investing in Private Credit

Private credit investing can be an attractive option for investors who are interested in diversifying their portfolios with alternative investments. Here are some of the primary reasons to consider private credit as an asset class.

Income Potential

Private credit can provide investors with current income if they’re collecting interest payments and fees on an ongoing basis. The more private credit investments someone holds in their portfolio, the more opportunities they have to generate regular cash flow.

Return Potential

Investing in private credit may deliver returns at a level well above what you might get with a standard portfolio of stocks, bonds, and mutual funds. The nature of private credit is such that borrowers may expect to pay higher interest rates than they would for a traditional bank loan. That, in part, is a trade-off since private credit offers lower levels of liquidity than other investments.

Investors benefit as long as borrowers repay their debt obligations on time. The exact return profile of any private credit investment depends on the interest rate the lender requires the borrower to pay, which can directly correspond to their risk profile and where the debt is situated in the capital stack.

Diversification

Like other alternative investments, private credit can introduce a new dimension into a portfolio, allowing for greater diversification of that portfolio. Private credit tends to have a lower correlation with market movements than stocks or bonds, which may help insulate investors against market volatility, to a degree.

Additionally, investors have an opportunity to diversify within the private credit segment of their portfolios. For example, an investor may choose to invest in a mix of senior lending, mezzanine debt, and specialty financing to spread out risk and generate varying levels of returns.

What Are the Risks of Investing in Private Credit?

Like any other investment, private credit can present certain risks to investors. Weighing those risks against the potential upsides can help determine whether private credit is the right investment for you.

Borrower Default

Perhaps the most significant risk factor associated with private credit investments is borrower default. Should the borrower fail to repay their debt obligations, that can put the value of your investment in question. In a worst-case scenario, you may be forced to wait out the resolution of a bankruptcy filing to determine how much of your investment you’ll be able to recover.

Again, it’s important to remember that borrowers who seek private credit may have been turned down for traditional bank financing elsewhere. So, your credit risk has already increased. If you have a lower risk tolerance overall, private credit may not be the best fit for your portfolio.

Illiquidity

Private credit investments are less liquid than other types of investments since they operate on a fixed term. It can be difficult to exit these investments ahead of schedule without facing the possibility of a sizable loss if you’re forced to sell at a discount.

In that sense, private credit investments are similar to bonds which also lock investors in for a preset period. For that reason, it’s important to consider what type of time frame you’re looking for when making these investments.

Recommended: Short-Term vs Long-Term Investments

Underwriting

While banks often have strict underwriting requirements that borrowers are expected to meet, private credit allows for more flexibility. Lenders can decide who to extend credit to, what collateral to require if any, and what terms a borrower must agree to as a condition of getting a loan.

That’s good for borrowers who may have run into trouble getting loans elsewhere, but it ups the risk level for investors. If you’re investing in private credit funds that are less transparent when it comes to sharing their underwriting processes or detailed information about the borrower, that can make it more difficult to make an informed decision about your investments.

Ways to Invest in Private Credit

Private credit has traditionally been the domain of institutional investors, though retail investors may be able to unlock opportunities through private credit funds.

These funds allow investors to pool their capital together to make investments in private credit, similar to the way a traditional mutual fund or hedge fund might work. You’ll need to find an investment company or bank that offers access to private credit investments, including private credit funds, funds if you’re interested in adding them to your portfolio.

One caveat is that private credit investments may only be open to selected retail investors, specifically, those who meet the SEC’s definition of an accredited investor, who is someone that fits the following criteria:

•   Has a net worth of $1 million or more, excluding their primary residence

•   Reported income over $200,000 individually or $300,000 with a spouse or partner for the previous two years and expects to have income at the same level or higher going forward

Investment professionals who hold a Series 7, Series 65, or Series 82 securities license also qualify as accredited.

đź’ˇ Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Who Should Invest in Private Credit?

Given its risk profile, private credit may not be an appropriate investment choice for everyone. In terms of who might consider private credit investments, the list can include people who:

•   Are interested in diversifying their portfolios with alternative investments.

•   Can comfortably assume a higher level of risk for an opportunity to generate higher returns.

•   Understand the time commitment and the risks involved.

•   Would like to support business growth through their investments.

•   Meet the requirements for a private credit investment (i.e., accredited status, minimum buy-in, etc.)

Private credit investments may be less suitable for someone who’s hoping to create some quick returns or is more risk-averse.

How Does Private Credit Fit in Your Portfolio?

If you’re able to invest in private credit, it’s important to consider how much of your portfolio you’d like to allocate to it. While you might be tempted to devote a larger share of your investment dollars to private credit, it’s wise to consider how doing so might affect your overall risk exposure.

Choosing a smaller allocation initially can allow you to test the waters and determine whether private credit investments make sense for you. That can also minimize the amount of risk you’re taking on as you explore new territory with your investments.

When evaluating private credit funds, it’s helpful to consider the fund manager’s track record and preferred investment strategy. A more aggressive strategy may yield better returns but it may mean accepting more risk, which you might be uncomfortable with. Also, take a look at what you might pay in management fees as those can directly impact your net return on investment.

The Takeaway

Private credit is a form of financing sought outside of traditional bank loans. For investors, it may be classified as an alternative investment, and it has its pros and cons in an investor’s portfolio.

Private credit can benefit investors and businesses alike, though in different ways. If you’re an accredited investor, you may consider private credit along with other alternative investments to round out your portfolio. Evaluating the risks and the expected rewards from private credit investing can help you decide if it’s worth exploring further.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Is Investing in Private Credit Worth It?

Investing in private credit could be worth it if you’re comfortable with the degree of risk that’s involved and the expected holding period of your investments. Private credit investing can deliver above-average returns while allowing you to diversify beyond stocks and bonds with an alternative asset class.

What’s the Difference Between Private Credit and Public Credit?

Public credit refers to debt that is issued or traded in public markets. Corporate bonds and municipal bonds are two examples of public credit. Private credit, on the other hand, originates with private, non-bank lenders and is extended to privately-owned businesses.

Why is Private Credit Popular?

Private credit is popular among businesses that need financing because it can offer fewer barriers to entry than traditional bank lending. Among investors, private credit has gained attention because of its return potential and its use as a diversification tool.

What Is the Average Return on Private Credit?

Returns on private credit investments can vary based on the nature of the loan agreement. When considering private credit investments it’s important to remember that the higher the return potential, the greater the risk you may be taking on.

Is Private Credit a Loan?

Private credit arrangements are loans made between a non-bank entity and a privately owned business. These types of loans allow companies to raise the capital they need without having to meet the requirements that traditional bank lenders set for loans.

Photo credit: iStock/Adene Sanchez

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Commodity ETF: What It Is and Examples

By | Growing Wealth, invest, Investing | Comments Off on Commodity ETF: What It Is and Examples

Commodity exchange-traded funds are ETFs that invest in hard and soft commodities. Commodities are raw materials — e.g. grain, precious metals, livestock, energy products — used for direct consumption or to produce other goods. Crude oil, corn, and copper are examples of commonly traded commodities.

Investing in a commodity ETF can offer exposure to one or more types of commodities within a single vehicle. There are different types of commodity ETFs to choose when building a diversified portfolio.

What Is a Commodity ETF?

A commodity ETF is an exchange-traded fund that specifically invests in commodities or companies involved in the extraction or production processing of commodities.

An ETF or exchange-traded fund combines features of mutual funds and stocks, in that they offer exposure to an underlying group of assets (e.g. stocks, bonds, derivatives). But unlike mutual funds, ETFs trade on an exchange.Whether you have broad or narrow exposure to commodities within a single ETF can depend on how it’s managed and its objectives.

Like other exchange-traded funds, commodity ETFs can be bought and sold inside a brokerage account. Each fund can have an expense ratio, which determines the cost of owning it annually, and brokerages may charge transaction fees when you buy or sell shares.

Commodity ETFs fall under the rubric of alternative investments, which also applies to private equity and hedge funds.

đź’ˇ Quick Tip: Alternative investments provide exposure to sectors outside traditional asset classes like stocks, bonds, and cash. Some of the most common types of alternative investments include commodities, real estate, foreign currency, private credit, private equity, collectibles, and hedge funds.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

How Do Commodity ETFs Work?

Commodity ETFs are pooled investments, with multiple investors owning shares. The fund manager determines which commodities the fund will hold and when to buy or sell holdings within the fund. When you buy shares of a commodity ETF, you invest in everything that’s held within the fund.

In many cases, that includes commodities futures contracts. A commodity futures contract is an agreement to buy or sell a set amount of a commodity at a future date for a specified price. That’s an advantage for investors who may be interested in trading futures but lack the know-how to do so.

A commodity ETF may follow an active or passive management strategy. Many commodity ETFs are structured as index funds. An index fund aims to track and match the performance of an underlying benchmark. These types of commodity ETFs are passively managed.

Actively-managed funds, by comparison, typically aim to outstrip market returns but may entail more risk to investors.

Types of Commodity ETFs

Commodity ETFs aren’t all designed with the same objectives in mind. There are different types of commodity ETFs you might invest in, depending on your goals, diversification needs, and risk tolerance.

Here are some of the most common ETF options commodities investors may choose from.

Physically Backed ETFs

A physically backed ETF physically holds the commodity or commodities it trades. For example, a physically backed ETF that invests in precious metals may store gold, silver, platinum, or palladium bars in a secure vault at a bank.

It’s more common for physically backed ETFs to hold hard commodities like precious metals, since these are relatively easy to transport and don’t have a shelf life expiration date. It’s less likely to see physically backed ETFs that invest in agricultural goods like wheat or corn, as they cannot be stored for extended periods.

Futures-Based ETFs

Futures-based ETFs invest in commodities futures contracts, rather than holding or storing physical commodities. That can reduce the overall management costs, resulting in lower expense ratios for investors.

A futures-based ETF may hold commodities contracts that are close to expiration, then roll them into new contracts before the expiration date. Depending on the price of the new futures contract, this strategy may result in a cost or gain for investors.

Commodity Company ETFs

Commodity company ETFs invest in companies that produce or process commodities. For example, this type of ETF may invest in oil and gas companies, cattle farming operations, or companies that operate palm oil plantations.

These types of commodity ETFs are similar to equity ETFs, since the investment is in the company rather than the commodity itself.

Examples of Commodity ETFs

Commodity ETFs are not always easily identifiable for investors who are new to this asset class. Here are some of the largest commodity ETF options with a focus on mitigating inflation.

•   SPDR Gold Trust (GLD). SPDR Gold Trust is the largest physically backed gold ETF in the world. The ETF trades on multiple stock exchanges globally, including the New York Stock Exchange (NYSE) and the Tokyo Stock Exchange.

•   Energy Select Sector SPDR Fund (XLE). This commodity ETF invests in companies in the energy industry, including oil and gas companies, pipeline companies, and oilfield services providers.

•   Invesco DB Agriculture Fund (DBA). The Invesco DB Agriculture Fund tracks changes in the DBIQ Diversified Agriculture Index Return, plus the interest income from the fund’s holdings. The index itself is composed of agricultural commodity futures.

•   First Trust Global Tactical Commodity Strategy Fund (FTGC). This commodity ETF is an actively managed fund that offers exposure to energy commodities futures.

•   Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC). PDBC is another actively managed ETF that invests in commodity-linked futures and other financial instruments offering exposure to the most in-demand commodities worldwide.

Pros and Cons of Commodity ETFs

Commodity ETFs have pros and cons like any other investment. It’s helpful to weigh both sides when deciding whether this type of alternative investment aligns with your overall wealth-building strategy.

Pros

•   Diversification. Commodity ETFs can offer a very different risk/return profile than traditional stocks or bonds. Commodities in general tend to have a low correlation with stocks, which can help spread out and manage risk in a portfolio.

•   Inflationary protection. Commodities and inflation typically move in tandem. As the prices of consumer goods and services rise, commodity prices also rise. That can offer investors a hedge of sorts against the impacts of inflation.

•   Access. Direct investment in commodities is generally out of reach for the everyday investor, as it may be quite difficult to hold large quantities of physical goods or raw materials. Commodity ETFs offer a simple and convenient package for investing in commodities without taking physical possession of underlying assets.

Cons

•   Volatility. Compared with other investments, commodities can be much more susceptible to pricing fluctuations as supply and demand wax and wane. Unexpected events, such as a global drought or a war that threatens crop yields, can also catch investors off guard.

•   No dividends. While some ETFs may generate current income for investors in the form of dividends, commodity ETFs typically do not. That could make them less attractive if you’re looking for an additional stream of passive income or are interested in reinvesting dividends to buy more shares.

•   Cost. Physically backed ETFs may pay storage fees to hold underlying commodities. Those costs may be folded into the expense ratio, making the ETF more expensive for investors to own.

Why Invest in Commodity ETFs?

Commodity ETFs can be worth investing in for those who wish to hedge against inflation or generate positive returns when stocks appear to be faltering. They also represent a more accessible alternative to direct investment in commodities, which may be difficult for an individual investor to manage.

Investors who are already trading futures contracts or are learning how to do so may appreciate the accessibility that commodity ETFs can offer. Commodity ETFs tend to be highly liquid, meaning it’s relatively easy to buy and sell shares on an exchange, a feature other alternative investments don’t always share.

A commodity ETF may be less suitable for an investor who has a lower risk tolerance or isn’t knowledgeable about the commodities market or futures trading. Talking to a financial advisor can help you determine whether commodities are something you should be pursuing as part of your broader investment plan.

đź’ˇ Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Tax Considerations When Holding Commodity ETFs

The type of commodity ETF you invest in can determine their tax treatment. Futures-based ETFs, for example, may experience losses or gains as contracts that are approaching expiration are replaced with new ones. Additionally, commodity ETFs that hold gold, silver, platinum, or palladium may be subject to a higher capital gains tax rate as the IRS considers precious metals to be collectibles.

Furthermore, the IRS 60/40 rule specifies that 60% of commodity capital gains or losses will be treated as long-term, while 40% are treated as short-term capital gains or losses for tax purposes. This rule does not consider how long you hold the investments, which could make commodity ETFs less favorable for investors who hold assets for one year or more.

It’s also important to be aware of how a commodity ETF is structured legally. Many operate as limited partnerships (LPs), which means they pass on annual income and gains or losses as a return of capital. Investors bear the responsibility of reporting their portion of fund profits and losses on Schedule K-1. If you’re not familiar with how to do so, that could add another wrinkle to your year-end tax prep.

The Takeaway

Adding a commodity ETF or two to your portfolio may appeal to you if you’re hoping to add some diversification to your holdings, and are comfortable with a potentially more volatile investment. When deciding which commodity ETFs to invest in, it’s wise to consider the underlying investments and the fund’s overall management strategy, as well as the fees you’ll pay to own it.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Why is it risky to invest in commodities?

Commodities can be volatile. Commodity prices depend on supply and demand, which can change dramatically owing to weather patterns, technological innovations, supply chain issues, and more.

Do commodity ETFs pay dividends?

Commodity ETFs typically don’t pay dividends to investors, regardless of which type of ETF you have. The goal of investing in commodity ETFs is more often capital appreciation rather than current income.

Is it better to trade physical commodities or ETFs?

For most investors, trading raw material commodities simply isn’t feasible. There are issues of transport, storage, insurance, and liquidity. For that reason, commodity ETFs have emerged to give investors exposure to desired commodities without the physical demands.

Photo credit: iStock/Nastassia Samal

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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How to Invest in Commodities: Ways to Invest, Pros/Cons

By | Growing Wealth, invest, Investing | Comments Off on How to Invest in Commodities: Ways to Invest, Pros/Cons

Commodities are the raw materials or basic goods that are used to produce many of the things you use every day. Investing in commodities such as crude oil, soybeans, livestock, and wheat can be an effective way to diversify a portfolio, hedge against inflation, and potentially generate returns.

Why Invest in Commodities?

Commodities are alternative investments that offer a low correlation to traditional asset classes like stocks or bonds. Thus, holding commodities in your portfolio can help minimize the impact of market volatility, as commodities prices are driven largely by supply and demand rather than the mood of the market.

Investing in commodities can also be a strategic play for investors who are hoping to counter the effects of rising inflation. As prices for consumer goods rise, the prices of the underlying commodities used to produce them also tend to rise. Stock prices, by comparison, do not always move in tandem with inflation.

Commodities can also be highly liquid assets, depending on how you’re trading them. Liquidity may be of importance to investors who are focused on generating short-term returns, versus a longer-term buy-and-hold approach.

đź’ˇ Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alts assets through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

5 Ways to Invest in Commodities

If you’re considering investing in commodities, there are several options to choose from. The one that makes the most sense for you will depend on your risk tolerance, time frame for investing, and how much capital you have to invest.

1. Physical/Direct Ownership

Physical ownership of commodities may be impractical for most individual investors as it involves taking ownership of the actual commodity. Purchasing and storing two tons of wheat, or maintaining 1,000 live animals likely isn’t realistic if you don’t have the proper facilities.

On the easier end of the spectrum, precious metal investors may hold gold or silver as bullion, or coins inside a secure bank vault. But even then, holding quantities of specific metals also require storage, insurance; and reselling these commodities comes with liquidity issues.

2. Commodity Mutual Funds and Exchange-Traded Funds (ETFs)

Commodity mutual funds and exchange-traded funds can offer exposure to commodities without requiring you to hold anything physically. There are three broad categories of commodity funds you might invest in:

•   Physically backed funds. These funds maintain direct ownership of commodities, specifically, precious metals. A gold commodity ETF, for example, may hold gold bars at a bank.

•   Futures-based funds. Futures-based commodity ETFs invest in futures contracts. We’ll explain those in more detail shortly, but in general, a future contract is an agreement to buy or sell an asset at a predetermined price on a set date.

•   Commodity company funds. Commodity company funds invest in commodity producers. For example, you might buy shares in an oil ETF that invests in oil and gas companies, oilfield servicers, and pipeline companies.

The main difference between a commodity mutual fund and a commodity ETF is how they’re traded. Mutual fund prices are set at the end of the trading day, while ETFs trade on an exchange just like a stock. Both commodity mutual funds and ETFs charge expense ratios, which represent the cost of owning the fund on an annual basis.

3. Commodity Futures Contracts

Commodity futures contracts are an agreement to buy or sell an underlying asset at a future date. The contract includes the price at which commodities will be bought or sold. Futures are derivative investments, meaning their value is determined by the price of another asset, i.e., the commodities you’re agreeing to trade.

Trading commodity futures contracts can be risky, as outcomes rely largely on investors making correct assumptions about which commodity prices will move. It’s possible to lose money on futures contracts if you’re expecting prices to increase but they decline instead.

4. Individual Stocks

Investing in stocks of commodity companies is another way to gain exposure to this asset class. For example, if you’re interested in adding energy sector assets to your portfolio you might buy shares in companies that produce oil, natural gas, solar technology, and so on.

Purchasing individual stocks can ensure that you’re only owning the companies that you want to, unlike a commodity mutual fund or ETF, which can hold dozens of different investments. However, picking individual stocks can be a bit more time-consuming and it may take more capital to buy shares if you’re choosing high dollar stocks.

5. Hedge Funds

Hedge funds are private investments that pool money to buy and sell assets, similar to a mutual fund. The difference is that hedge funds tend to use high-risk strategies like short-selling and may require a higher minimum investment to buy in or limit access to accredited investors only. Under SEC rules, an accredited investor is someone who:

•   Has $200,000 or more in annual income ($300,000 for married couples) for the previous two years and expects the same level of income going forward

•   Has a net worth exceeding $1 million, not including their primary residence

Financial professionals who hold certain securities licenses also qualify for accredited status.

Hedge funds can potentially offer higher returns than other commodity investments, but the risks are greater as well. If you’re considering private investment in commodities through a hedge fund you may want to talk to a professional about the pros and cons.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

How Do You Open a Commodities Investing Account?

Opening a commodities trading account is no different from opening any other type of brokerage account. You’ll first need to decide which brokerage you want to trade with, then complete the necessary paperwork and funding requirements to start trading.

Personal Information

When you open a brokerage account, you’ll need to provide some basic details about yourself. That includes your:

•   Name

•   Date of birth

•   Social Security number

•   Email and phone number

•   Mailing address

•   Driver’s license number

•   Annual income

•   Net worth

•   Employment status

•   Investment objectives and risk tolerance

You may also be asked about your experience with investing and your citizenship status. You’ll need to disclose whether you’re employed by a brokerage firm.

All of this information is required to verify your identity, meet FINRA’s suitability requirements, and comply with anti-money laundering regulations. Net worth and income information may also be used to determine whether you meet the standards for an accredited investor.

Minimum Funds

The minimum amount of money you’ll need to invest in commodities through your brokerage can depend on what you’re investing in. If you’re buying individual commodities stocks, then the stock’s share price will determine how much you’ll need based on the number of shares you plan to buy.

With commodity mutual funds minimums are typically determined by the brokerage. So you might need $1,000, $3,000, or $5,000 to get started, depending on what you’re buying. Commodity ETFs sell on a per-share basis, similar to stocks.

Some brokerages offer fractional share trading, which allows you to buy shares of mutual funds, ETFs, or stocks in increments. The minimum investment may be as low as $1, though it’s important to keep in mind that it can take time to build up the commodity portfolio of your portfolio when investing in such small amounts.

Trading futures can be a little trickier as you may need to meet a minimum investment requirement and margin requirements. Margin is a set amount of money you’re required to deposit with the brokerage as a condition of trading futures contracts.

Margin is typically calculated as a percentage of the contract but it can easily run into the thousands of dollars.

Pros and Cons of Investing in Commodities

Investing in commodities has advantages and disadvantages, and it may not be right for every investor. Examining the pros and cons can help you make a more informed decision about whether it’s something you should pursue.

Pros

•   Commodities can help you diversify your portfolio beyond traditional stocks and bonds.

•   Investing in commodities can act as an inflationary hedge since commodity prices usually move in sync with increases in consumer prices.

•   Commodity ETFs and mutual funds offer a lower barrier to entry versus direct investment or hedge funds, making commodities more accessible to a wider range of investors.

•   Returns may potentially outstrip stocks, bonds, and other investments.

•   Commodity trading may generate short-term profits

Cons

•   Commodity prices can be volatile, as they may be affected by natural disasters, geopolitical conditions, and other factors.

•   Investing in commodities is generally riskier than other types of investments since supply and demand can impact trading.

•   Holding physical ownership of commodities may not be feasible for every investor.

•   Futures trading in commodities is highly speculative and while there may be potential for higher returns, there’s also more risk involved.

Is Investing in Commodities Right for Me?

Whether commodity trading makes sense for you can depend on your preferences concerning risk and your time horizon for investing. You might consider commodities if you are:

•   Comfortable trading the potential for higher returns against higher risk

•   Looking for short-term gains versus a long-term, buy-and-hold investment

•   Savvy about futures contracts (if you plan to trade futures)

•   Have sufficient capital to meet minimum investment requirements

Before investing in commodities, it’s helpful to learn more about the different types and their associated return profiles. It’s also wise to consider any costs you might pay to trade commodity ETFs, mutual funds, and stocks or the margin requirements for commodity futures trading.

The Takeaway

Although the commodities market is complex, commodities themselves are tangible products that are relatively easy to understand. Investing in commodities can take many forms, including direct or cash investment via the spot market, or by investing in commodity-related funds.

Although trading commodities comes with its own set of risks, commodities may offer some protection against inflation and traditional market movements, because these products are driven by supply and demand.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Are there IRA accounts that specialize in commodity trading?

Some brokerages offer an IRA that’s designed for trading commodity futures contracts. You may also be able to gain exposure to commodity ETFs or mutual funds with a regular traditional or Roth IRA.

How much money do I need to invest in commodities?

The amount of money you’ll need to invest in commodities will depend on which vehicle you’re using. With a commodity stock or ETF, the amount of money required would depend on the share price and the number of shares you plan to purchase. Direct investment, hedge fund investments, or commodity futures contracts may require a larger financial commitment.

Can you make money with commodities?

Investors can make money with commodities through capital appreciation or by trading futures contracts. Returns may be higher than traditional assets but you may need to accept a greater degree of risk when trading commodities.

What is the risk profile for someone investing in commodities?

Investing in commodities often means being comfortable with more risk, as commodity prices can fluctuate quickly. You may want to limit your commodities allocation to 5%-10% of your portfolio to minimize your risk exposure.

Photo credit: iStock/filadendron

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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