Ride the Commodities Bull With ETFs

Once upon a time, only the extremely wealthy could invest in commodities. This is no longer the case.

As the prices of gold, copper and oil have moved dramatically higher over the last couple of years, individual investors have become more interested in gaining exposure to them, and financial institutions have responded by creating investment products that allow easier access to commodities.

There are two gold exchange-traded funds in the U.S., with a silver ETF and a crude oil ETF on the way. I expect a copper ETF will be created soon as well.

Opportunities are emerging as well for individual investors to gain exposure to broad selections of commodities.

Merrill Lynch brought out an interesting basket product in November called the Rogers International Commodity TRAKRS, which trades on the Chicago Mercantile Exchange under the ticker symbol RCI. It is a futures contract that expires on Oct. 26, 2010. It includes 35 different commodities ranging from actively traded items like crude oil and gold to less sexy products like tin and wool (the primary wool futures exchange is in Australia). It has 44% of its exposure in energy, 35% in agriculture and 21% in metals.

Rogers International Commodity TRAKRS

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Source: Rogers International Commodity TRAKRS

Unfortunately, it's not that easy to buy. It's available through Merrill Lynch or you can inquire with any futures commission merchant that does business though the Chicago Mercantile Exchange.

On Jan. 27, an easily accessible exchange-traded product from Deutsche Bank called the DB Commodity Index Tracking Fund will be listed on the American Stock Exchange under the ticker DBC.

However, its composition will be much narrower than the Rogers product, with exposure to only six commodities. It will have 35% in light sweet crude, 20% in heating oil, 12.5% in aluminum, 11.25% in corn, 11.25% in wheat and 10% in gold.

Both of these products are complex, with varying tax issues that need to be understood. They have the potential to be very volatile and will trade differently than stocks.

iShares will have its own commodities ETF soon and that may end up being a better way to go, given the narrow scope of the Deutsche Bank fund.

Why to Buy

A good reason to invest in commodities is that they often zig when stocks zag, as can be seen on the following chart.

Commendable Returns Commodities have outperformed equities since 1998

Source: The Rogers Raw Materials Index, RRMI

As commodities expert Jim Rogers points out, bull markets in commodities can last for 15 years -- the current bull market could have another 10 years to run.

There are also advantages to owning a commodity product instead of the common stock of a mining or oil company. Many companies have political or geographic risks that can make them, at times, the wrong stock to own, while the underlying commodity is unaffected. Last week, Royal Dutch Shell (RDS.A) lagged the rest of the energy sector because of the violence in Nigeria that forced it to shut down production there. Oil prices, however, moved up in reaction to the news.

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