2 ETFs for shaky commodities markets

These managed funds offer a more nuanced approach to navigating an uncertain sector.

By TheStreet Staff Jun 14, 2011 11:15AM

Image: Corn field (© Bob Rashid/Brand X/Corbis)By Don Dion, TheStreet


Using ETFs, it is possible to alleviate some of the headaches associated with today's rocky commodities investing environment.


Until recently, commodities stood out as a popular destination for many investors as sweeping global market strength helped propel the prices of metals, agricultural products and energy sources along seemingly uninterrupted upward paths.


Over the past few weeks, however, commodities have stopped moving in unison, calling into question this full-steam-ahead mentality. While some resources such as corn are powering toward record highs, others, such as nickel, are facing substantial headwinds.


This shift has not gone unnoticed and, as the Financial Times pointed out last week, many commodities investors are adjusting their investing approaches to better deal with this type of environment. Rather than diving headfirst into commodities, many are opting for a more tactical approach. Such a strategy better ensures that they are able to zig and zag along with the fluid commodities landscape.

Investors looking to follow suit and take on a malleable approach to commodities investing may want to consider looking at managed futures exchange-traded products like the Elements S&P CTI Total Return ETN (LSC) and the WisdomTree Managed Futures Strategy Fund (WDTI).


Both track the performance of futures contracts that are linked to a diverse collection of commodities ranging from gold and silver to live cattle. However, unlike traditional commodities-related ETFs and ETNs, these funds are designed in a way that will allow investors to better navigate uneven scenarios.


Rather than simply taking a universally long position on commodities, LSC and WDTI use rules-based strategies to determine whether to invest in or bet against individual index components. This way, the fund can benefit from the strength of outperformers as well as the weakness of underperformers.


At this time, the exposure of these two funds is appropriately representative of the bipolar state of the commodities industry. LSC is currently flat energy, long grains and precious metals, and short industrial metals, livestock and soft commodities such as cocoa and sugar. WDTI's split is similar.


WDTI boasts a more expansive portfolio than LSC, however. On top of providing investors with exposure to the commodities spectrum, the fund also sets aside a portion of its portfolio for currencies and Treasuries. Currently, the fund is nearly universally long this category. The Canadian dollar stands out as its only short position.


The more expansive exposure gained by using WisdomTree's fund comes at a cost. The fund currently carries a 0.95% expense ratio. LSC, meanwhile, charges investors 0.75% in fees.


Over the past 30-day period, this managed futures approach has paid off. Not only have LSC and WDTI successfully beaten the performance of passive, broad-based commodities futures ETF products like the PowerShares DB Commodities Fund (DBC), but the funds have also outperformed the SPDR S&P 500 ETF (SPY).

It is crucial to note that, while attractive given the current investing scenario, both LSC and WDTI have struggled to generate interest. Light daily trading volume may make these funds particularly susceptible to liquidity issues. Be sure to keep any exposure small and focused.


As we work through this slow, arduous multi-week soft spot, many regions of the market have become increasingly difficult to navigate. For instance, a glaring split has reared its face in the commodities realm. LSC and WDTI are two funds that may help relieve some of this uncertainty.


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