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3 New Funds Access Agri Commodities

Derivatives-based funds have been getting a lot of negative attention in the media lately due to the trading scandal at UBS. The "rogue trader" story, despite the headlines, did not involve the malfunction of any ETFs. It was about a trader who lied about having hedges in place that were not actually in place. That being said, derivatives-based funds like these do take on the risk of their counter parties failing one way or another, either failing on the contracts or going out of business. This type of failure is not realistically probable but it is a possibility.

Exchange-traded notes are unsecured debt obligations of the issuer and so the risk there is that the issuer can no longer meet its obligation (in the face of default, note holders should expect nothing). Again, the likelihood of a failure after so much effort went into preventing these banks from failing in 2008 makes this a very low probability, but it is possible.

The tradeoff for buying commodities like wheat and sugar are the risks above. An investor who puts 2% to 3% into a fund that fails would be right to be upset, but they would be far from wiped out. Anyone for whom these remote risks are unacceptable should avoid the funds.

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At the time of publication, Nusbaum was long GLD, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.
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