Ideas for Commodity ETFs - Metals ETFs, Agriculture ETFs

Alternatives to protect your portfolio from inflation, alternatives to Gold investing.

Investment Ideas - Commodity ETF's.

When the economic picture gets more and more unstable, the masses swarm into commodities as a hedge against inflation and for a feeling of safety.  I've been doing some thinking about the trend, with these two conclusions:

1.  Gold probably hasn't hit it's high as of August 2011, and may not for another year or two, possibly until a year after the 2012 elections, when we get a feel for whatever new congress, and perhaps president) comes in.

2.  Despite that, Gold seems to be driven by momentum even more than by current events.  In more popular terms, there's a bubble.  And given that Gold's return is 21.2% over the last three years (August 2008 – 2011), but only 7.3% per year during the 50 years from 1960-2010, that's a big bubble.

3.  Commodities in general may have their own bubble.  But I believe that the ‘less glamorous’ commodities will have lower ‘bubble risk’.  Other commodities are still a good investment to diversify against stock market risk. 

Now the tough part.  Commodity ETF's aren't like the S&P 500 ETFs, or QQQ ETFs, or other stock market funds.  Those funds are usually invested in the stocks that make up the indexes that they represent, perhaps with a little extra financial magic (like small options contracts) to help things match up better.  These commodity funds are actually ETN (Exchange Traded Notes).  ETNs are tradable ‘notes’ or contracts promising to pay amounts over time that match the commodity price.  They don’t have the tracking risk that ETFs would, but instead add credit risk:  if the commodity price rises, will the underlying futures contracts in the fund be enough to pay you your gains?

These funds discussed below may contain as little as a single futures contract, with a second contract to bridge the gap when the old contract expires.  They also may invest in short-term bonds, which provides a little income, but is more to hedge the futures contract.

These funds aren’t for weak hearts, and by themselves are some of the most risky ETF’s available.  Fortunes have been made and lost in commodities, perhaps even in the same day.  So this sector isn’t a big part of your portfolio, and you aren’t counting on it for your retirement, as much as you are probably using it as a little protection for your nest egg.  Here are some Commodity ETF ideas:

1. iPath Funds for Agriculture:  JO (Coffee), SGG (Sugar), BAL (Cotton), and COW (Livestock).  World food prices are rising, and these commodities, often forgotten by investors, can move more independently of the stock market than food companies.  And just in case you were wondering, the “COW” fund is composed of futures on lean hogs and live cattle.  Or, as my friends refer to it, “barbecue”.  As an alternative, you can try out JJS, composed of future on coffee, cotton, and sugar.

2.  iPath Funds for Industrial Metals:  JJN (Nickel), JJU (Aluminum), LD (Lead), JJT (Tin).  When was the last time you went to a party and heard someone brag about their investment in Gold?  How about Lead or Tin?  These aren’t as exciting as Gold or Silver, to be sure, but in my opinion, that’s exactly why I am spending more time researching these funds than other precious metals.  If you are looking instead for a single fund, take a look at JJM (combining Aluminum, Lead, Zinc, and Copper).

For information on International ETFs check out this article!

If your portfolio needs diversity into commodities, talk to your financial adviser about the consequences of adding these funds to your portfolio, and completely understand the prospectus of funds purchased.  These funds are recommended for your review, not for purchase.  No guarantee of returns, excess returns, or reduced risk is implied.