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Since the bull market in Commodities began back in
2002, investors have seen Commodities become their own asset class.
Investors are
looking for hard assets to place in their portfolios to protect
against inflation and diversification to add to their profits.
With this diversification comes a negative correlation between
Commodities and Stocks. A recent study shows that the correlation
between the UBS Commodity Index and the Stock market was only .33 over
the last ten years.
Some of the ETFs that are related to Commodity investing. ETFs can
lose as much as five to ten per year of their return value in some
Futures markets because of this type of situation. This becomes more
of a problem if you select an ETF that is Commodity specific GLD
Gold, USO – Oil, UNG – Natural Gas, because any of these markets could
be in contrast and each time the ETF has to rollover their contracts,
the fund will take a profit hit.
Remember that word diversification? Well, it applies in
ETFs also. By investing in ETFs that track the broad Commodity indexes
as opposed to Commodity specific indexes such as Gold, Oil,
Natural Gas, you will have a portfolio of a group of Commodities and
not all of them will be in conflict at the same time.
Some may actually be inverted markets and this offers great pricing at
rollovers for the ETFs. You should see how inverted
markets offer lower prices with each succeeding contract. One note of
caution about Commodity ETFs: Always read the broker's prospectus and
make sure that the ETF is tracking the physical Commodities and that
the ETF is not tracking companies related to producing or processing
these Commodities.
ETFs that have baskets of Commodities in each:
RJI - Rogers International Commodity
GSG – S&P GSCI Commodity Index
GCC – Green Haven Continuous Commodity Index
DJP – Dow Jones Commodity Index
DBC – Powershares DB Commodity Index
When selecting ETFs that have baskets of Commodities, always
review the prospectus and review the weightings of each ETF. Some ETFs
are heavily weighted in energy products, while others might be more
agricultural. Try to find a more balanced ETF where each sector
is relatively equal to another.
If you decide not to invest in a broad sector Commodity
Index, there are ETFs that specialize in a specific Commodity. Traders
can invest in these, that still diversify by putting non-correlated
ETFs together to offer better risk
protection from over investing in a single Commodity. This usually
happens when a particular Commodity is in the news and new
traders put all their money in this one ETF. When Commodities do
create bubbles, they come down faster than anyone can imagine.
Just look back at Crude Oil when it rallied to $147 almost in a parabolic
fashion and then when the bubble burst, prices came back
down in the lower $30 range very quickly. You need to be careful and
do your home work.
Here is a list of popular ETFs that specialize in specific Commodities
with their exchange symbol:
DBA – Powershares DB Agriculture Fund
USO – United States Oil Fund
SLV – Ishares Silver Trust
IAU – COMEX Gold Trust
GLD – SPDR Gold Shares
What most investors don't realize is that the first step in
successful trading is to simply think different than most.
Looking at the current economic climate, you can see that the bond
prices peaked in August 2010. We are
in for a stock peak in the latter part of this year and a double dip
recession in 2012. You can see that the stock market, although
still rising, is struggling to maintain its fast pace. As for the
commodities, gold and silver continue to shine as oil prices are
driving up the costs of gasoline and other products we consume
regularly. This offers some excellent opportunities for you in the
increased volatility as long as you manage your risks and look for
those great trades. |
