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What Commodity ETF Investors Should Know

Many of the commodity products offered by iPath and UBS are structured as ETNs.

3. Commodity-Intensive Equities

Frustrated with the impact of contango on certain exchange-traded commodity products, some investors have turned to equities of commodity-intensive companies as an alternative means of establishing exposure to natural resource prices. Because the profitability of hard-asset producers is often impacted significantly by the prevailing level of prices for the related commodities, a strong correlation generally exists between these assets.

However, investors should remember that the holdings of these ETFs are not commodities, but stocks, and as such will generally exhibit a higher correlation with equity markets than spot commodity prices (thereby potentially diminishing one of the primary advantages of investing in commodities).

There are a handful of ETFs offering both broad-based exposure to asset producers (e.g., HAP) as well as more targeted exposure to gold miners (GDX, PSAU), agribusiness companies (PAGG, MOO), timber stocks (CUT, WOOD), and steelmakers (SLX, PSTL). A complete list of the ETFs included in the Commodity Producers Equities ETFdb Category is available here.

3b. IndexIQ ARB Global Resources ETF (GRES)

This ETF employs a unique investment strategy to offer exposure to commodity products, and as such is worthy of its own subset of the commodity-intensive equities heading. GRES invests in global companies that operate in commodity-specific market segments, but also includes short exposure to the S&P 500 and MSCI EAFE Index, essentially isolating the return component generated through movements in commodity prices.

At the time of publication, Johnston had no positions in ETFs mentioned.

Michael Johnston is the senior analyst and founder of ETF Database, a Web-based investment resource providing actionable ETF investment ideas and an ETF Screener for investors analyzing potential ETF investments. Johnston oversees ETF Database's free ETF Newsletter, one of the most popular sources for news and commentary focusing exclusively on the exchange-traded fund industry. Johnston also maintains and develops content for ETFdb Pro, a line of analyst reports and model portfolios designed to help investors utilize ETFs to meet their investment goals.

Johnston has completed the Chartered Financial Analyst (CFA) program, and obtained his bachelor's degree in finance from the University of Notre Dame. Prior to founding ETF Database, Michael worked in a private client service group performing valuations of companies operating in a wide range of industries.

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