NEW YORK ( TheStreet) -- Both ETF issuers and mutual fund companies are vying for investors in commodities. Investors looking for exposure to the broad commodities sector can now choose from active or passive management and futures or equities-based strategies. When comparing commodity ETFs and commodity mutual funds, the fundamental differences should certainly be considered. While ETFs trade throughout the trading day, mutual funds are generally priced just once. Passive ETF strategies are generally lower-priced than active mutual funds. While an active trader should use ETFs to easily trade in and out of the commodities sector during trading sessions, long-term investors may prefer the oversight provided by mutual fund managers.
Equities-Based FundsEquities-based commodity ETFs and mutual funds track the stocks of commodities producers. Rather than tracking the physical commodities themselves, these funds track companies that are involved in the commodities business. The Fidelity Global Commodities ( FFGXC) mutual fund, Jefferies Global Commodity ETF ( CRBQ) and Market Vectors Hard Assets Producers ETF ( HAP) all track large, global, commodities producers. All three funds count Monsanto ( MON), Exxon Mobil ( XOM), Potash ( POT), Syngenta and Chevron ( CVX) among their top 10 holdings. While the three funds may share similar holdings, there are differences in fees, size and track record. HAP, launched in August of 2008, is the oldest of the bunch. Fidelity's FFGCX was introduced in March of 2009, while CRBQ recently began trading in September of 2009. CRBQ has an expense ratio of 0.65%, while HAP and FFGCX have expense ratios of 0.75% and 1.75% respectively. When it comes to concentration, the top 10 holdings in CRBQ, HAP and FFGCX account for 37%, 33% and 27% of those funds' assets respectively.
Since all three funds are relatively new, it is difficult to compare performance. Year to date, HAP is up nearly 33%. For the three-month period ending November 12, HAP and FFGCX were up 10.5% and 11.1% respectively. All three funds have similar holdings and portfolio concentration, so the best bet here is to go with an HAP. The mutual fund selection, FFGCX, could prove to be more stable over time, but investors should stick to the cheaper ETF with a slightly longer track record for now.
Futures-based FundsA group of derivative-based mutual funds and ETFs offer investors exposure to the price of a basket of commodities. The Rydex Commodities Strategy ( RYMBX) mutual fund and iShares S&P GSCI Commodity-Indexed Trust ( CSG) ETF both aim to track the S&P GSCI¿ Commodity Index. Investment in these funds provides investors exposure to the prices of energy, livestock, agricultural and metals futures. While futures-based commodity funds offer a more "pure" exposure to commodities prices than equity-based peers, uncertain regulation has plagued these products in recent months. The Commodities Futures Trading Commission is expected to set limits on the numbers of futures contracts that these funds can hold. These futures limitations have already impacted the trading of $1.7 billion dollar GSG, and could potentially affect the $66.5 million dollar RYMBX if investor interest amps up. GSG had to halt creation of new shares of the fund in August to stay within anticipated regulatory limits. Changes in this regulation could be passed on to investors as premiums in the trading of ETFs or increased costs for mutual funds.
Year to date, GSG has advanced 10.35% while RYMBX has risen just 4.80%. Rydex charges a 1.64% net expense ratio for RYMBX, while iShares sets GSG's net expense ratio at 0.75%. Between these two futures-based funds, the less-expensive GSG makes more sense in lean times. Since they both track the same index, and both face the same regulatory challenges, the accessibility of the ETF pays off for now. Another option worth considering is the massive $14.6 billion dollar PIMCO Commodity Real Return Strategy ( PCRAX) mutual fund. This fund also uses derivatives to track commodity prices, but collateralizes this exposure with bonds. This fixed income portion of the portfolio is heavy in TIPS, and has performed well in the stock-market bounce-back. Year to date, PCRAX is up more than 31%. The cost-effective structure of ETFs has helped to make these products affordable competitors in the commodity space. Active investors who need to trade in and out of the sector should consider using liquid ETFs to gain exposure. Sometimes, however, an active manager and strong firm can bring value to a fund. In the case of PCRAX, PIMCO's renowned team of fixed-income experts have helped the fund to outperform. -- Written by Don Dion in Williamstown, Mass.