Asset Classes for Futures and Commodities Trading

When we talk about the available  commodities tradings markets, we tend to group them into categories or sectors or asset classes based on their likeness and similarity.

Below we’ll highlight the main asset classes, include some of the more well-known commodity trading futures contracts as examples as well as some other information useful for traders.

Currencies:  With all the different types of currency being exchanged in this world as a means of making transactions, some are so widely used – and trusted – there are also available specific currency futures contracts as a means of trading large blocs of that particular currency.  Some of the more prominent futures contracts are the Euro (equal to trading €12,500), the Japanese Yen (equal to trading ¥12,500,000) and the British Pound (equal to trading £62,500). Other important currency futures contracts include the Swiss Franc, Australian & Canadian dollars and Mexican Peso.  These markets are traded on the Chicago Mercantile Exchange 23 hours a day, from 5:00 P.M. around the clock to 4:00 P.M, Central Time.

Energies: While there are hundreds and hundreds of energy futures contracts listed on the NYMEX exchange – sub-categorized under asset classes like coal, electricity, ethanol, crude oil, natural gas and refined products – hands down the all-time trading leaders in terms of daily volume number just five: West Texas Crude Oil, Brent Crude Oil, Reformulated Unleaded Gas, Henry Hub Natural Gas and Ultra-Low Sulphur Diesel, more commonly known as Heating Oil.  Like all futures contracts, energy futures are leveraged products. For example, one Crude Oil futures contract controls 1,000 barrels of the product. Energy products influence every facet of our lives. Not surprisingly, they are some of the most widely traded futures contracts in the world.

Financials: Financial Futures are associated with those futures contracts whose underlying assets are interest-bearing instruments.  Those traded on U.S. exchanges include futures contracts whose underlying assets have longer-term maturities, like the 30-yr. Treasury Bond and the 10-yr. Treasury Note (traded on the Chicago Board of Trade).  Futures contracts whose underlying assets have short-term maturities include the Eurodollar (90 days), traded on the Chicago Mercantile Exchange. Its underlying asset is a 90-day deposit of 1 million U.S. dollars in banks outside the United States – in Europe, Tokyo or Beijing.  The Eurodollar is largest futures contract in the world. Prior to the electronic trading, the Eurodollar trading pit at “the Merc” was the largest trading pit ever, nearly the size of a football field.

Metals:  Futures contracts whose underlying assets are certain metals include Gold, Silver, Copper, Platinum and Palladium, all traded on the COMEX Exchange.   As was the case as far back as 4,000 B.C. – the age of the oldest-known adorned artifacts – gold still takes the top prize in terms of futures market trading interest.  These days, apart from its intrinsic value, gold’s attractiveness is also derived from its standing as a “safe haven” asset, as well as an inflation hedge. Given the nick name “Dr. Copper,” for its honorary degree in economics, the Copper futures contract’s underlying asset is 250,000 pounds of the metal first used by humans.  It’s so widely used – being a good conductor of electricity, attractive for a wide range industrial applications and relatively inexpensive compared to other metals – its futures contract’s price is seen as a global economic indicator.

Grains:  Of all the futures contracts traded on U.S. exchanges whose underlying assets are tangible commodities, as opposed to those that are “cash settled” (more on those later), grain futures are the hallmark asset class.  It was this commodities trading that spurred the creation of a central marketplace; farmers and buyers could sell and buy corn under established procedures for weighing and grading their crops. As farmers and buyers began making early-year commitments to conduct transactions later in the crop year, the futures contracts as we know them evolved.  Agreed-upon contracts could now change hands before the agreed-upon date with and between other participants- essentially during the entire crop year. Today, wheat, corn, oats, soybeans and its main by-products soybean oil and soybean meal are enormous markets. And with the vicissitudes of weather (temperature, precipitation) and its effects on crop quality being a major factor in determining prices, grain futures can be some of the most volatile markets traded today.

Meats: Alas, when we talk about livestock futures, the one contract widely considered the iconic commodity in popular culture – Pork Bellies – is now a distant memory.  Delisted in 2011, in its hey days in the late ‘70’s and early 80’s the “bellies” pit was the center of excitement on the Chicago Mercantile Exchange. Today, Lean Hogs is the futures contract for the pork trader.  For beef interests, Live Cattle and Feeder Cattle trade.

Indices:  Some of the more heavily traded futures contracts among speculative traders are stock index futures contracts and not surprisingly.  Among all subjects financial in nature we think of in the world, stock indexes like the Dow Jones Industrial Average, the S&P 500 and Nasdaq Composite – and the stocks that make them – are the most often discussed, analyzed and reported on.   Oddly, stock index futures were a rather late arrival, with the S&P 500 and Nasdaq futures contracts first introduced in 1982. It wasn’t until 1997, in the interest of increasing accessibility through a reduced multiplier, that the E-mini line of futures was introduced.  All indexes’ prices are a multiplier of the value of the prices of all the stocks within their individual indexes. And unlike other futures contracts, stock index futures contracts do not involve physical delivery; you can’t actually conduct a transaction of little slices of the 500 stocks in the S&P 500, for example.  Instead, the contracts are cash settled, so the buyer and seller receive the cash difference (credited or debited depending on the outcome of the trade) on the last day of the contract’s life. Today, stock index futures are traded all over the world. Their underlying assets are some of the most well-known entities in finance: Hong Kong’s Hang Seng, Japan’s Nikkei, the United Kingdom’s “Footsie” (FTSE),  Germany’s DAX, France’s CAC 40.

Softs:  Cocoa, coffee, cotton, orange juice (who doesn’t remember the famous scene in Trading Places), and sugar.  These futures contracts’ underlying assets make up some of the oldest futures contracts traded. They represent staple products we all consume and they’re worthy opportunities for allocating risk.  Some of the longest-remembered bull and bear markets – and some of the most volatile – in all commodities trading have involved these markets. Weather’s beneficial and adverse effects on these commodities’ crops have made for some historical moves.

Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors.  Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.