Trade Commodity Stocks, ETFs, or Futures Contracts?
Unfortunately, our propensity toward the familiar often holds us back and I feel this is even more true in regards to the world of trading. Despite the human tendency to gravitate to the norm, I would like to challenge your perception of the markets and the way you approach price speculation. Perhaps thinking outside of the box will lead you into alternative arenas and improve the efficiency of your trading ventures.
The futures markets often get a "bad rap" by the investment community thanks to horror stories in regards to traders losing their house along with their shirt. However, losses are possible in any market. It doesn't seem fair to blame the trading venue, the blame might lie with the participants themselves. That said, there are certainly more temptations in the futures markets than in most other arenas.
If you are going to speculate, do it in the futures markets
I have found that equity traders are reluctant to use the futures markets as a trading vehicle. This is partly because it is more convenient to simply buy a commodity ETF with their stock broker, or their broker might even offer limited access to some futures contracts. Yet, choosing the familiar and convenient road, generally comes with the baggage of inefficiency. In short, ETFs don’t always follow the underlying asset, and stock brokers offering future trading on the side are typically ill equipped to provide proficient service to traders.
Another hesitancy stems from the fact that a futures contract isn't an asset; instead it is a liability. Specifically, despite the statistic that most speculators sell their obligation before the delivery process, a futures contract is actually an agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated date in the future. To clarify, futures traders are not exchanging the commodity itself, just an agreement to exchange the commodity. Therefore, unlike equities, futures traders have no feeling of ownership.
I’m not convinced this is a valid argument. Let's face it...aside from a monthly brokerage statement that says so, many stock or ETF holders don't really own anything either; ask those holding shares of Lumber Liquidators. Shareholders are, in essence, guaranteed the future cash flows, if any, of that particular security but the benefits of ownership seem to end there.
There are some compelling reasons to look toward trading in the futures markets with a true commodity broker. I hope that you are able to open your mind to an unconventional but perhaps more efficient marketplace. We will focus on the most popular stock index futures contract, the e-mini S&P but the same principals can be applied to all commodities. For instance, a silver speculator could buy an ETF, buy a silver mining stock or they could streamline their efforts through the purchase of a silver futures contract.