Do You Really Need a Futures Broker?

Answer 1

Sophisticated investors understand that having futures as a part of a well-diversified portfolio is a good idea. One reason is the relative non-correlation between the two other major asset classes typically found in an investment portfolio; namely stocks and bonds. Most people understand the rationale of using stocks and bonds together since often, when stocks go down, bonds go up and vise- versa. This is referred to as negative correlation.

Futures do not correlate very much either positively or negatively with stocks or bonds. Having futures in your portfolio is a good way of diversifying with an asset class that isn’t affected much by the stock or bond market. However, many people consider futures a bit mysterious because they hear terms like “financial derivatives” and “forward contracts.” This is why, historically, investors seeking to add futures to their holdings go out and find an appropriate futures broker.

Futures trading involves much more than just commodities. In the past, futures contracts were traded in commodities such as sugar and coffee and even pork bellies but today, there are futures contracts on currencies as well as stock and bond indexes. Futures are financial derivatives and do involve forward contracts but you might not necessarily need to get a futures broker to do your bidding. Essentially, there are other investment vehicles available to you that allow you to participate in the futures market without having to hire a futures broker.

For example, an investor could invest in any number of mutual funds that specialize in futures. Of particular note, there are mutual funds called Exchange Traded Funds or, ETFs for short. These are technically mutual funds but they are generally traded on exchanges such as the New York Stock Exchange or the NASDAQ and they are purchased and sold just like stocks.

There are numerous ETFs available to help investors get exposure to a wide range of commodity-related investments such as gold or natural gas. There are also many ETFs that take a “basket” style approach and have a variety of different commodities in the same investment vehicle.

There are disadvantages to using ETFs rather than a futures broker directly but for many investors, futures-related ETFs are a good way to get involved.