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A Steadier Way to Hold Commodities

Among the most broadly diversified funds is GreenHaven Continuous Commodity Index (GCC). Instead of emphasizing some sectors, GreenHaven gives equal weight to each of 17 different commodities. Under this scheme, cocoa has as much impact as crude oil.

Lately, the equal-weight approach has been working. This year, GreenHaven has lost -5.9%, ranking as the top-returning broad-basket commodity ETF. During the past five years, the fund has lost 4.7% annually, compared to an annualized loss of 13.8% for energy-heavy iShares S&P GSCI.

Spencer Bogart, an ETF analyst for IndexUniverse, recommends the Greenhaven fund for investors seeking a diversified approach. But he argues that there are legitimate reasons for investors to prefer an energy-heavy fund. "If you spend a lot of money on energy, then you may want to hedge your exposure by holding a fund that will go up when oil prices rise," he says.

Some investors were disillusioned with commodities funds because of their poor showing during the financial crisis. In the turmoil of 2008, the S&P 500 dropped 37%, and the S&P GSCI ETF did even worse, losing 45.8%. Critics said that commodities funds no longer provided the kind of diversification that they offered in the past.

Since the financial crisis, commodities have begun showing lower correlations with stocks. So there is good reason to expect that broad-based ETFs can provide important diversification in future markets.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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