NEW YORK ( ETF Digest) -- Aside from traditional non-correlation of commodity markets to conventional portfolio allocations, concerns about food prices offer strategic investment opportunities in this sector. When prices of foodstuffs are rising, it makes sense to be able to profit or even hedge against these events. This logic naturally would include other commodity ETF/ETN products directed toward metals, energies and currencies. That said, these targeted agricultural markets aren't for everyone. Some on our listing are perhaps too targeted and take unique skills to understand how they may be utilized. Grains are influenced by weather, seasonality, currency, disease and many other factors. Meats may trade counter-intuitively given weather and disease as farmers drive herds to markets at odd times. Cotton is affected by similar conditions and the health of the overall economy. So-called "softs" including coffee, sugar and cocoa also have their unique circumstances including regional issues.
As a former CTA (Commodity Trading Advisor) and CPO (Commodity Pool Operator), I know the value of having an allocation of most portfolios to the commodity sector. These provide increased diversification opportunities for any portfolio. After nearly 40 years of seeing these positive effects during a variety of market conditions, I know first-hand their benefits. Four other risk factors should be considered:·The CFTC's varying considerations regarding commodity position limits as applied to the assets of ETF and ETNs is still in limbo.·The credit quality of ETNs given these are "notes" many guaranteed by Barclay's and Deutsche Bank.·Backwardation (back month contracts lower than front month) and Contango (back months higher than front month) can negatively affect contract rollover for investors. ·Since most commodities trade in dollars, the value of the dollar can positively or negatively affect performance. Deutsche Bank features inverse and leveraged long ETNs for those investors wishing to hedge or speculate. But some of these markets may be thin and/or illiquid taking unique skills to utilize them effectively.Whereas our previous technical analysis methodology involved using evaluating monthly charts commodity markets must be viewed with shorter time horizons. This is due to obvious increased volatility but also due to the peculiar nature with which underlying commodity contracts trade. Some contracts expire monthly and others quarterly. Some have serious seasonal characteristics inherent with agricultural issues such as growing seasons, weather and disease. Therefore, it pays to be more active and utilize a combination of weekly and daily charts to manage risk. We utilize many indicators to evaluate technical conditions including the 22 period weekly moving average and MACD indicator. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues but I've rarely met a successful fundamental commodity trader. Premium members to the ETF Digest receive added signals when markets become extended such as employing DeMark triggers to exit overbought/oversold conditions.