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How to invest in cotton

A guide to investing in one of the world's most traded commodities.

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Cotton makes up around half of the fiber used in the production of our clothes and other fabrics. 20 million tons is harvested and traded each year; for comparison, that is around 20 T-shirts for each human being annually.

Due to its demand, cotton has a large and fairly stable presence on the stock market, making it a favourite for investors. You can buy or sell an interest in cotton through a variety of investment vehicles.

1. Cotton ETFs

Instead of investing in the stock of one or two companies, exchange traded funds (ETFs) give you the option of placing your money with a bundle of assets.

ETFs are a simpler way of entering the market. While they work much like regular stocks, ETFs are protected from market movements through diversification — they don’t rely on the performance of one company.

If you are still learning the basics of investing, then ETFs are a great introduction. Cotton is a massive industry that’s been around for a long time, so it may be a good place to start. Here are a few options to consider:

  • Cotton price ETF
    • iPath Series B Bloomberg Cotton Subindex Total Return ETN (BAL), which tracks the price of cotton
  • Overall agriculture ETFs
    • Elements Agriculture Total Return (RJA), which tracks an index of agricultural commodities where cotton is a major component
    • Invesco DB Agriculture Fund (DBA), which tracks an index of agricultural commodities where cotton is a minor component

Pros

  • By bundling stocks from different companies together, ETFs give you access to a larger part of the industry.
  • ETFs are considered by some to be the safest choice for investors.

Cons

  • Because you are investing in a collection of stocks, you lose some of the control you might have had with a single company’s stock.

2. Cotton stocks

Stocks are a common option for investors, taking back the control you lose when investing in ETFs while also remaining less risky than futures. While stocks run a comfortable middle ground between the other options, they are still vulnerable to market movements and should be approached with a bit of market knowledge.

Cotton is a massive industry and will continue to be as long as we choose to wear clothes. There are plenty of brokerages offering a selection of company stocks for you to choose from, and with its prevalence, cotton may be a good place to start. Here are some of the biggest names in the industry:

  • Cotton manufacturers
    • Albany International (AIN)
    • Unifi (UFI)
    • Culp (CULP)
  • Textile- and clothing-focused brands
    • Ralph Lauren (RL)
    • Columbia Sportswear (COLM)
    • Tapestry (TPR)
    • Gildan (GIL)
    • Hanesbrands (HBI)
    • PVH Corp. (PVH)

Pros

  • A range of company stocks to choose from.
  • Withdraw from the market whenever you want.
  • Stable and conventional approach to investing.
  • Investment control.

Cons

  • While futures are certainly more dangerous, stocks still have their risks. Market fluctuations are unavoidable and can have a real impact on your investment.

3. Cotton futures

Futures are one of the riskier methods of investing, and while they can be very profitable, they can just as easily lose you a lot of money. Futures trading is more commonly the domain of cotton farmers or manufacturers, though investors and speculators can also buy and sell futures contracts through select brokerage accounts. Only a few mainstream brokerage accounts allow futures trading alongside stocks, ETFs and options.

By investing in futures, you are agreeing to buy a commodity at an agreed price to receive directly at a later date. If the price you agree to buy at ends up being lower than the price of the commodity when you receive it, you will have made a solid return; however, the market may go against you and you could end up paying more than necessary.

Futures operate on both buyer knowledge and luck. If you are new to investing, it is recommended you learn the ropes before considering futures as an option.

Pros

  • Investing in futures gives you complete ownership over a commodity.
  • If you make the right investment, futures can bring you solid returns.

Cons

  • There is a real element of gambling present in futures, and you can end up paying dearly for a mistake.
  • Futures expire if they aren’t used within a certain period of time, becoming worthless.

Compare these providers for access to cotton ETFs and more

Name Product Available asset types Stock Fee Option Fee Account Fee ETF Transaction Cost
Wealthsimple Trade
Stocks, ETFs
$0
N/A
$0
Free
Buy and sell thousands of US and Canadian stocks and ETFs commission-free with Wealthsimple Trade.
Interactive Brokers
Stocks, Bonds, Options, Mutual Funds, ETFs, Currencies, Futures, Precious Metals
Min. $1.00, Max. 0.5% of trade value
$1.50 min. per order
$0 (if monthly commissions are equal to or greater than US$10.00)
Min. $1.00, Max. 0.5% of trade value
Access market data 24 hours a day, six days a week and invest in global stocks, options, futures, currencies, bonds and funds from one single account.
Questrade
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs, International Equities, IPOs, Precious Metals
$4.95 - $9.95
$9.95 + $1 per contract
$0
Free
Opt for self-directed investing and save on fees or get a pre-built portfolio and take some of the guesswork out.
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Compare up to 4 providers

Reasons to invest

  • Cotton is a staple commodity that is almost always in demand.
  • Demand in fast-developing countries like China and India is likely to outpace their ability to produce cotton.
  • Consequences of climate change could disrupt the production of cotton in various places around the world, stifling its supply and causing higher prices.

Is cotton a safe investment?

  • Stockpiles: Countries hoarding cotton can influence prices if they decide to withhold their stockpiles during a shortage or put them on the market when there is no domestic demand.
  • Subsidies: Policies to keep prices low and supply high can be altered over time, influencing prices both positively and negatively.
  • Substitutes: Synthetic materials such as polyester can undercut the price of cotton and weaken its market share. Large but struggling economies can drastically influence prices if they switch to a cheaper material.
  • Environment: Weather shifts will influence pollination, growth and yield, subsequently impacting supply.
  • External influences: Other industries can have an influence on cotton prices. If oil becomes more expensive, the harvesting and production costs for cotton can rise as a result. It is a good idea to keep an eye on relevant industries.
Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

Cotton is an in-demand staple you can invest in by purchasing stocks, futures and ETFs. But keep an eye out for shifts in competing industries and commodities that could impact the market.

Explore your investing options across trading platforms and commodities before you make a decision.

Frequently asked questions

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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