ETF options galore for commodities

Investors looking to gain exposure to commodities through exchange-traded funds have a variety of choices.

By TheStreet Staff Oct 26, 2011 11:08AM

By Don Dion, TheStreetTheStreet


Sweeping macroeconomic turmoil and looming market doubts have created a treacherous environment for commodity investors over the past few months. While the risk of an upheaval remains present, as we have seen in recent days, the fog may be lifting on hard assets.


At the start of the week, industrial giant Caterpillar (CAT) injected a welcomed dose of confidence into commodities. The firm noted that its mining branch had been a major contributor to its analyst-beating quarterly earnings numbers.


In addition, looking ahead CAT appeared confident that demand for mined resources will remain strong. In the middle of the summer, the company expanded its reach into the mining industry, spending over $8 billion to acquire Bucyrus International, an equipment firm.


Investment professionals are optimistic about hard assets as well. On Monday, Bloomberg reported that the number of bullish bets on commodities from the hedge fund industry had increased to levels last seen in August. According to the report, waning concerns about a double-dip recession combined with improving sentiment towards emerging markets are helping to restore these investors' appetites for energy and agricultural products.


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In the past I have pointed to futures-backed funds like the PowerShares Commodity Fund (DBC) as an attractive ways to gain exposure to commodities.


While long-only products like DBC are attractive during periods of strength, I also directed investor attention towards the WisdomTree Managed Futures Fund (WDTI) during the opening half of the month. This pseudo active ETF casts a net over a wide collection of commodity- and currency-tracking futures contracts, taking long and short positions. This strategy allows the fund to navigate any market environment.


These funds have proven to be effective for resource-hungry investors in the past. However, not all individuals are comfortable with the idea of targeting their favorite commodities using futures contracts. Those wary of these instruments may want to consider taking aim at hard assets using an equity-backed ETF.


The growth of the ETF industry has led to the creation of a vast collection of funds designed to provide investors with exposure to single commodity-related industries. For example, investors can use products like the Market Vectors Agribusiness ETF (MOO), Market Vectors Coal ETF (KOL) or the First Trust ISE Revere Natural Gas Index Fund (FCG) to gain exposure to leading companies in the agriculture, coal, and natural gas industries respectively.


For active investors, products like MOO, KOL, and FCG are attractive. By adding, removing, or tweaking exposure to these funds, it is possible to construct a portfolio that takes advantage of strength and avoids weak spots.


Those lacking the time and patience needed to utilize such a strategy, however, may be better off using a one-stop-shop commodity producer ETF like the Market Vectors RVE Hard Assets Producers ETF (HAP).


It takes only a quick look at HAP's top holdings to see why conservative, hands-off investors may be attracted to this product. The index underlying the fund is dominated by household names across the agriculture, energy, and materials spectrum. Some of the HAP's largest holdings include Potash of Saskatchewan (POT), Exxon Mobil (XOM) and BHP Billiton (BHP).

The past few months have ignited fears and driven many out of risky assets. Despite lingering doubts about the state of the global economy, I encourage investors to avoid writing off commodities entirely.



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