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Make
Money From Rising
Commodity
Prices
Soaring oil, corn, wheat and other commodity prices are squeezing
consumers. But you don’t have to take it anymore. Thanks to
exchange-traded-funds, you can make money from rising commodity prices.
I’ll give you a few ideas in a minute, but first some background.
Commodities include energy products such as crude oil or natural gas,
agricultural products such as corn or coffee, industrial metals such as
copper and lead, precious metals such as gold and silver, and livestock
such as cattle and hogs.
Until recently, buying futures was the only way to invest in commodities.
Because they are short-term vehicles, futures are too risky for most
individual investors.
Doable With Exchange-Traded Funds
However, the advent of exchange-traded funds that track commodity
indexes have made commodity investing doable for individual investors.
Exchange-traded funds (ETFs), as you may know, are similar to index mutual
funds. They track the performance of a specific market segment by
following its index, for example, the S&P 500.
ETFs trade just like regular stocks, and you pay the same commissions that
you would for trading stocks. Unlike conventional mutual funds, which
discourage frequent trading, you can buy and sell the same ETF all day
long, should you desire. You can also sell them short (short sellers
profit when the stock or ETF that they’ve shorted drops in price, but lose
if it goes up instead).
Originally, ETFs tracked mostly stock indexes. But over the past two or
three years, new ETFs have been introduced that track indexes reflecting
commodity futures prices. Or, in the case of gold and silver, the ETFs
actually track the prices of the metals. However, the ETF shares do not
trade at the same price as the commodity. For instance, an ETF tracking
crude oil doesn’t trade at the same price as a barrel of oil. Instead, it
trades at a specified fraction of the crude oil price. For the most part,
ETF share prices move the same percentage as the commodity. For instance,
if crude oil prices double, so will the corresponding ETF’s share price.
However, ETFs, like mutual funds, have expenses that prevent them from
fully tracking the performance of the tracked commodity. For instance, a
1% expense ratio would subtract
1% from an ETF’s annual return. In most
instances, ETF expense ratios run below 1%.
Use ETF Performance Charts
Both MSN Money (moneycentral.msn.com)
and Morningstar offer ETF performance charts that you can use to compare
the returns of various ETFs over selected timeframes. I used Morningstar
to do the research for this column. From Morningstar’s homepage (www.morningstar.com),
select ETFs, then click on “View
Complete List” in the “Most Popular ETFs By Trading Volume” section.
Finally, click on the timeframe of interest to sort the list with the best
performers at the top. Once you've spotted funds of
interest, ETF Connect (www.etfconnect.com)
is your best resource for further research on each fund.
I looked for commodity ETFs that had recorded strong performance over the
past 12-months, and were still going strong based on their last
three-months’ returns. Here are some that caught my eye.
Commodity ETF Ideas
PowerShares DB Agriculture (ticker symbol
DBA) is a pure play on the price of the most widely traded
agricultural commodities: soybeans, corn, sugar and wheat. The fund tracks
an index reflecting futures prices for these four commodities, but is
intended to reflect the performance of the agricultural products in
general. This is a sector that has only recently taken off. The fund has
gained 44% over the past three months, accounting for most of its 61%
12-month return.
iShares S&P GSCI Commodity Indexed Trust (GSG)
tracks a broad index of 24 commodities weighted according to the
proportion of the commodity flowing through the economy. Almost half of
the index reflects crude oil, and the balance is split between other
energy products such as natural gas as well as agricultural commodities,
industrial and precious metals, and livestock. The fund has returned 44%
over the past 12-months and 12% over the past three-months.
If you want a more diversified
commodity play, the iPath Dow Jones-AIG Commodity Index Fund
(DJP)
tracks an index comprised of 30% energy, 30% agricultural, 20% industrial
metals, 10% livestock and 10% precious metals. The fund only returned 27%
over the past 12 months. But reflecting the current hot agricultural
commodity market, is up 17% over the past three months.
If you want a pure play on oil, the United States Oil Fund (USO)
tracks the futures prices of West Texas Intermediate light, sweet crude
oil. The fund recorded a 57% gain over the past 12-months. While the pace
has slowed, oil prices are still moving up and the fund has gained
5% over the past three months.
For a more diversified energy play, the PowerShares DB Energy Fund
(DBE)
replicates an index tracking the prices of two different grades of crude
oil, heating oil, gasoline and natural gas. The fund has returned 49% over
the past year and 10% over the past three-months.
If you are interested in gold, the streetTRACKS Gold Shares Fund (GLD)
tracks the price performance of gold bullion. The fund returned 38% over
the past year and 15% over the past three months.
If you want to mix some silver in with your gold, the iShares Silver
Trust (SLV)
tracks the price of that precious metal, which until recently had gone
nowhere. However, now it’s on a tear. The fund has gained 27% in the last
three months
Commodity prices are notorious for going through boom and bust phases, and
many experts think that they’ve already overshot on the upside. Others,
pointing to the growing economies in China, India, Brazil, and other
emerging countries, say commodity prices can only head higher.
However, all would agree that commodities are risky business. So don’t put
the kids college money, or funds you’ll need for retirement here.
published 3/2/08 |
