When it comes to investing in commodities, the people I know have two opposite emotions — either obsessed or terrified.
I can see why. The commodity markets — contracts representing tangible goods like gold, oil, grains, etc — are known for sharp reversals and wild volatility. The potential profit can be enormous if your forecast is correct. If you’re wrong … let’s just say the results aren’t pretty.
Today I’m going to tell you about some of the best new investment instruments created in my lifetime — and how their very existence is under attack from powerful vested interests.
Commodity ETFs Revolutionize Investing!
Until recently, commodity investing was mostly restricted to professional traders, large institutions and a few intrepid individuals. This began to change with the introduction of commodity-based ETFs.
The idea wasn’t really so complicated: Start a fund whose price is based on a commodity market or a commodity-related index. Simple in concept, but difficult in reality mainly because of legal restrictions, these took a long time to resolve even as stock-based ETFs thrived.
Finally, the first commodity ETF launched in 2004. SPDR Gold Shares (GLD) was an immediate success. With the path now open, a flurry of similar funds hit the market in the next few years, tracking all kinds of commodities.
It didn’t hurt that this period was accompanied by a huge bull market in all kinds of natural resources. Crude oil went from less than $40 to more than $140 per barrel, gold climbed from around $400 an ounce to over $1,000, and corn jumped from $2 all the way up to $6!
With investors clamoring to get into booming commodities but afraid to trade highly-leveraged futures and options, these ETFs came at the perfect time.
Many were actually offered under a new structure called exchange-traded notes, or ETNs, that look a lot like ETFs but have some important differences. (See my February 6, 2009 Money and Markets column about the unique risks of ETNs.)
Three Kinds of Commodity Funds
Commodity ETFs and ETNs can be broken down into three groups:
1. Broad-based: These track an index that includes many different commodity markets. These are very useful to long-term investors who want to allocate a small portfolio slice to commodities and don’t care so much about following particular markets. Some examples are …
- iShares S&P GSCI Commodity Index (GSG)
- PowerShares DB Commodity Index (DBC)
- GreenHaven Continuous Commodity (GCC)
2. Commodity Sectors: This type of fund tries to cover a particular category of commodities, like energy, agriculture, metals, etc. These are naturally more volatile than the broad-based funds, but have the potential to move much higher if the sector takes off. This group includes funds like …
- PowerShares DB Energy (DBE)
- PowerShares DB Agriculture (DBA)
- Elements Rogers ICI Metals ETN (RJZ)
3. Specific Commodities: Funds in this category track the price of one particular market, like GLD that I mentioned above. These are considered very speculative. Here are some you might have heard about …
- United States 12-Month Oil Fund (USL)
- iPath DJ AIG Sugar ETN (SGG)
- iPath DJ AIG Copper ETN (JJC)
As with stock ETFs, some commodity ETFs and ETNs are designed to deliver leveraged and/or inverse returns. These features can be useful but also bring extra volatility and risks. They should be used very cautiously.
Regulatory Chaos Threatens to Eliminate Innovation
…read more HERE.
P.S. I’m now on Twitter. You can follow me at http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Ron Rowland is president and a founder of Capital Cities Asset Management. Mr. Rowland is widely regarded as a leading ETF and mutual fund advisor as well as a sector rotation strategist. In addition to his roles of President and Chief Investment Officer of CCAM, he is Executive Editor and Publisher of the All Star Fund Trader, a highly regarded investment newsletter in its 18th year of publication.
You may have read about Mr. Rowland and his strategies in publications such as The Wall Street Journal, The New York Times, Investor’s Business Daily, Forbes.com, Barron’s, Hulbert Financial Digest and many more. Outside of CCAM, Mr. Rowland served on the Executive Committee of Austin’s American Association of Individuals Investors (AAII) and led the mutual fund special interest group for numerous years.
As a former mutual fund manager from 2000 to 2002, Ron was a pioneer in using ETFs inside of mutual funds. He also served as the manager of a hedge fund from Aug. ‘93 to Dec. ‘94. His formal education includes a BS in Electrical and Computer Engineering from the University of Cincinnati in 1978 with additional studies in the same field at the University of Texas from 1978-1981.