Two Less-Risky Ways to Invest in Commodities

Having a little bit of inflation, it's been said, is like being a little bit pregnant. It can grow and grow, and ultimately dominate your life.

Right now, we are experiencing more than a little bit of inflation. It's squeezing us at the gas pumps and horrifying us with clips of food riots in Asia.

The influx of news about the commodity boom is enough to tempt otherwise conservative investors to think about climbing aboard the "hard assets" bandwagon.

Fund investors interested in broad exposure to the commodities game are accommodated by a number of open-end mutual funds and exchange-traded funds that offer commodity exposure. But these portfolios are primarily loaded with futures contracts and structured notes that tend to fluctuate more in tandem with the volatile quote levels in the wild and wooly commodity trading pits.

Typical fund investors are likely to prefer a smoother ride in their attempt to hedge against rising prices and reap some profits from the current expansion in commodities prices.

For investors interested in exposure to commodities, but in search of a less wild ride than funds and ETFs loaded with futures contracts and commodity derivative instruments, two possibilities are summarized in the accompanying table.

The Direxion Commodity Bull 2X FundDXCLX and the RS Global Natural Resources FundRSNRX invest in stocks of commodity-related corporations, rather than hyper-volatile futures instruments and derivatives.

A warning, however, is that that the Direxion fund, as the "2X" in its name suggests, although linked to stocks, is leveraged to produce returns at roughly twice the amplitude of movements in the underlying securities. Its gearing is achieved through the use of equity swap contracts in the Morgan Stanley Commodity Related Equity Index. The index, however, is one of commodity-related corporate stocks and not futures, derivatives or hard assets.

Whereas many funds focus on a single area of commodity-related investments, such as petroleum producers or precious metals miners, the portfolios of the Direxion and RS funds cover broad ranges of hard assets, including various metals, energy sources, chemicals and, in the case of Direxion, food and forest products.