How to Invest in Commodities Funds

Commodities -- the seemingly unstoppable growth of prices therein -- has been a hot topic for investors in recent months.

Traditionally, exposure to commodities has been achieved using futures contracts on individual materials such as metals or agricultural output. These highly leveraged vehicles offer huge rewards at equally lofty levels of risk.

Paul Brigandi, portfolio manager of the Direxion Commodity Trends Strategy Fund(DXCTX Quote), agreed to answer some questions about the commodities markets.

Brigandi will discuss alternative ways to gain exposure to commodities that avoid the wild volatility as well as the leverage of as much as 50-to-1 associated with some commodity futures contracts. It turns out that alternative investments in commodities are available. They offer ways to hedge against inflation in addition to potentially lowering the overall volatility of an investor's total holdings.

(Note: The Commodity Trends Strategy Fund, whose total expense ratio is 1.84%, was launched on June 10 and is not yet covered by TheStreet.com Ratings database. A recent article about commodity mutual funds mentions another fund managed by Brigandi, the Direxion Commodity Bull 2X Fund(DXCLX Quote). Here's another article about mutual funds and the commodities boom.)

TheStreet.com: Paul, being the manager of a commodities mutual fund, I'm sure you are imminently qualified to talk about commodity investment alternatives to traditional futures contracts.

In the past, and still today to some extent, commodities have typically been used as short-term trading vehicles rather than long-term buy-and-hold investments. There are a variety of reasons for the short holdings periods, including the leverage, the extreme levels of volatility and the up and down cyclical nature of the various asset classes.

A better and less risky way, to invest in commodities and have the staying power to hold positions over the intermediate to long term, is through commodity mutual funds, exchange traded fund and commodity-related stocks. Investors can invest in these with a portion of their portfolios and they will not be subject to the daily margin requirements associated with commodity futures. This immunity to margin calls means they can withstand volatile moves in the commodities markets without having to post additional cash.