One thing that has been clear about ETFs is that new product innovation will allow individual investors to access parts of the market that had not been easily available. The folks at PowerShares, in conjunction with Deutsche Bank, have rolled out a couple of products so far, and on Friday they rolled out seven new commodities-based ETFs.

Here are the seven:

  • PowerShares DB Agriculture Fund (DBA)
  • PowerShares DB Base Metals Fund (DBB)
  • PowerShares DB Energy Fund (DBE)
  • PowerShares DB Oil Fund (DBO)
  • PowerShares DB Precious Metals Fund (DBP)
  • PowerShares DB Silver Fund (DBS)
  • PowerShares DB Gold Fund (DGL)

As evidenced by the names, some of the funds (Oil, Silver and Gold) invest in single commodities, and those charge a 0.50% expense fee. Some are multi-commodity funds (Agriculture, Base Metals, Energy and Precious Metals) and charge a 0.75% fee. The various funds will use futures contracts to create the exposure. All of the funds employ something called the optimum yield formula, which is an attempt to minimize the consequence of price distortions caused by rolling to new futures contracts, known as contango , as current ones expire.

Chances are you have heard the virtues of the diversity that comes with commodity exposure. This is true, and according to information about the funds from Deutsche Bank, the track records of the underlying indices all have very low correlations to the S&P 500.

This is an important point. The stock market has an up year the vast majority of the time. If you are buying something you expect will have a low correlation to stocks, you need to be prepared for the possibility that the commodity fund you buy may not go up very often, or more likely will not go up as much as stocks might, over the longer term.

Most of the indices that underlie the funds have 10-year track records that lag stocks. Or if they don't lag, the outperformance is skewed because of huge up years such as the 47% one-year return for silver or the 89% one-year return for the industrial metals.

Another crucial aspect to grab onto here is that these funds will be volatile. Most of the funds are as volatile as or much more volatile than the S&P 500. So these are just as volatile as stocks but have a low correlation to them. This tells me that loading up on them may not be ideal for most folks.

While it may seem like I am negative on these funds, I do in fact think they are potentially great tools to introduce to a diversified portfolio. First of all, they zig when stocks zag most of the time. They also serve as a potential dollar hedge; commodities are priced in dollars, so if the dollar goes down, commodity prices tend to go up, all things being equal.

It is true that commodities were not a great place to invest during the secular bull market in stocks from 1982 to 1999, but in the last couple of years, commodities have done well. Many believe we are in the early stages of what could be a 15-year bull run in commodities. While that may or may not be true, what is true is that commodities are a legitimate asset class and that having some exposure makes for good diversification.

How much is appropriate? Every so often, someone smart will be quoted as saying investors should have 10%-15% in commodities. For people who hire professional management that might be true, but I think that is too much.

I maintain a 3%-4% exposure to gold, and I can see adding 2%-3% in the Agriculture Fund once I get a feel for how it trades on a day-to-day basis, but I would expect these holdings to be a drag on the portfolio if stocks go up a lot. Anyone speculating on commodities with a 20% portfolio weight is taking on a lot of risk. This may not be bad, but it is risk nonetheless.

One last point is that I have a lot confidence that these funds will capture the intended effect. However, they may not turn out to be the best commodity funds forever, if they even are now. I think there will be other funds that enter the space. If you use any of these funds for exposure, you need to pay attention when new products come out, because they may turn out to be superior.
At the time of publication, Nusbaum held no positions in the stocks mentioned, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., 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.