For investors for whom the high cost of admission of index funds is daunting, there is the option of commodity exchange-traded funds. They include full-basket ETFs such as the iShares GSCI ETF (GSG), the iPath DJ-UBS commodity ETN (DJP) as well as commodity-specific ETFs such as United States Oil (USO) and the United States Natural Gas (UNG).
These funds offer immediate and easy access for retail investors, as they are traded and priced just like stocks. They are, however, uniformly horrible investments. The fund fees tend to be high. What's more, these funds are forced to use front-month commodity futures to correlate the fund's price to commodity prices. They're also forced to "roll" their futures positions every 30 days, a profit-robbing contrivance for shareholders. At best, commodity ETFs represent value for a just few days and are best used as a daytrading tool. Any long-term investment in these ETFs will vastly underperform the commodity basket's movement, whether up or down.
The final method for accessing commodity exposure is through managed futures funds -- like the doomed Peak Ridge and Amaranth funds. This is clearly the riskiest method for retail investors as you do not necessarily track the basket of commodity prices. You are, in fact, betting on a trader and his ability to outsmart a market, as with any other hedge fund. You do avoid the "roll premium" implied by most ETFs, but of course you also risk a possible "blow up" that wipes away all of your investment.
So what is the takeaway? If all three direct investment vehicles have unique handicaps, how should you invest?My advice is to commit to stocks that are directly correlated to commodities. In commodities such as gold and copper you can invest in mining stocks, and in oil and natural gas you can invest in energy producers. Unfortunately, there's no way to gain access to many of the soft commodities such as corn and coffee using this method. Of course, the human element of greed will ensure that we continue to see commodity funds raising easy capital from investors looking to capture some outsized gains, and we'll continue to see some of them explode, taking all the investor money with them. That's how inviting this overheated commodity market looks right now.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV