ETF vs. Mutual Fund: Commodity Producers

For investors seeking exposure to the world of commodity producers, there are two promising options.
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NEW YORK (TheStreet) -- Two of the most promising options for investors seeking exposure to the world of commodity producers are the Market Vectors-RVE Hard Assets Producer ETF (HAP) - Get Report and the Fidelity Global Commodities Stock Fund (FFGCX) - Get Report.

Both FFGCX and HAP are relatively new to the investing scene. HAP, the elder of the two, made its first appearance in late August, 2008. A little over a half a year later, in March, 2009, Fidelity's mutual fund option was launched. Though young, both products have managed to gather impressive assets. FFGCX boasts $392 million assets under management while HAP has $100 million.

Based on the Rogers-Van Eck Hard Assets Producers Index, HAP exposes investors to a diverse selection of names hailing from various branches of the commodity industry. The fund's roster is dominated by the top four holdings:

Exxon Mobil

(XOM) - Get Report

,

Monsanto

(MON)

,

Potash of Saskatchewan

(POT)

and

Deere

(DE) - Get Report

, which combine for 17% of assets. The portfolio quickly becomes more balanced, however, and in total, HAP's top 10 positions represent less than one-third of its total portfolio.

HAP also lives up to its global title, holding positions in some of the most popular resource producers from around the globe. Russia's

Gazprom

(OGZPY)

, Italy's

ENI

(E) - Get Report

and South Korea's

Posco

(PKX) - Get Report

all appear in the portfolio.

HAP carries a 0.65% expense ratio.

Unlike HAP, the Fidelity Global Commodities Stock Mutual Fund has a manager, Joe Wickwire. FFGCX's assets are allocated across three sectors: energy, metals and mining, and agriculture. Many of the firms held by FFGCX to represent these sectors are the same as those in HAP. Top holdings include Monsanto,

BHP Billiton

(BHP) - Get Report

, Exxon Mobil,

Syngenta

(SYT)

and

Rio Tinto

(RTP)

. Together, FFGCX's top ten positions account for less than 30% of the fund's total portfolio.

Typical of mutual funds, FFCGX's expense ratio is considerably higher than its ETF competitor. Investors are charged 1.42% to hold FFGCX, and it also has a 1% short-term trading fee for shares held less than 30 days.

Both instruments' exposure to Monsanto has me somewhat concerned. As I explained last week in the article,

Agribusiness Bulls Led to Slaughter, this agricultural titan has recently run into its fair share of hurdles, reporting poor earnings, reducing forecasts, and struggling with its RoundUp branch. This week, the company announced that it was lowering its full year guidance. Throughout 2010, the company's shares have taken a nosedive, dipping over 33%.

MON accounts for slightly more than 4% of both FFGCX and HAP.

Since it tracks a passive index, HAP does not have the ability to move in and out of a troubled holding like Monsanto on a whim. FFGCX's portfolio manager on the other hand, has the ability to reduce or exit positions at any time in order to best position the fund for gains. While the most recent data suggests that he's stuck with Monsanto, he does have a larger weight in BHP Billiton and Rio Tinto, and a smaller weight in Exxon, and this has helped FFGCX outperform HAP since inception. Also, over the past one-year period, HAP is down about 1%, while FFGCX has gained nearly 5%.

Further strengthening the case for FFGCX over HAP is the ETF's low volume. Although not dismal, the fund's average volume is only slightly over 50,000.

For now, investors looking for broadly diversified global commodity producers should stick with FFGCX.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.