Trust In Jim Rogers

By Aaron Levitt | May 11, 2009 AAA

Just as Bill Gross is seen as the "Bond King," Jim Rogers is looked upon by the commodity community as the hard asset guru. As one half of the famous Quantum Fund, along with George Soros, Rogers made a name and a fortune for himself. Helping to popularize physical goods investing for the average Joe, his words, like Warren Buffett's, are usually taken to heart. So when he speaks, people listen.

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In a recent Barron's article, Rogers talked about the increasing inflation due the U.S. economic stimulus and the world's nations running the "printing presses" in order to pay for it all. Rogers also touched on the future growth of China and the nations of the Far East. To that end, he mentions that he has been buying commodities through the Elements branded Rogers Commodity ETNs via four funds.

ELEMENTS
Rogers International Commodity ETN (NYSE:RJI)
ELEMENTS Rogers International Commodity Metal ETN (NYSE:RJZ)
ELEMENTS Rogers International Energy ETN (NYSE:RJN)
ELEMENTS Rogers International Commodity Agriculture ETN (NYSE:RJA)

He states that these Rogers International Commodity ETNs are great ways to play both the inflation angle as well as the growth in China. While individual commodities are becoming more and more important as pieces of the individual investor's portfolio, as inflation rears its ugly head, it's not proven whether those exchange-traded notes are the way to go.

Elements Run into Trouble
The Rogers International Commodity Index (RICI), on which RJI is based, has gained 158% since its inception in 1998. In the same time, the S&P 500 has fallen about 23%. The index is a thing of beauty, comprising 36 different futures. The problem isn't with the index, but with the note sponsors.

Investors tend to lump exchange traded funds (ETFs) and exchange traded notes (ETNs) into the same boat, but there are fundamental differences. Besides the legal aspects, ETFs are subject to the Investment Company Act of 1940. ETNs fall under the Securities Act of 1933, and the major difference is that ETNs are really nothing more than unsecured debts - a promise to pay holders the return of an index. ETF investors have a claim on the assets they hold. Not so for exchange-traded notes. The Elements line of Exchange Traded Funds is unique in that it uses several different issuers under one umbrella. Unfortunately, most of them are running into trouble. (Find out which futures, options or funds will be your perfect commodity portfolio fit; read How To Invest In Commodities.)

Aktiebolaget Svensk Exportkredit, or Swedish Export Credit Corporation (SEK), the third largest ETN issuer and sponsor of the Rogers notes, announced at the end of March that it was going to have to reinstate earnings from 2006 forward. The company mentioned in the filing that it needed to do so "in order to correct certain technical errors in the marking to market of a small number of derivative positions, assets and liabilities required to be reported at fair value." SEK believes the restatement shouldn't have any effect whatsoever on its ability to service its outstanding debt and other obligations. This remains to be seen, however. A note in SEC document also states that the issuer will not issue any new shares of the fund until the reinstatement is completed. A note on the Elements home page states that this should occur on May 18.

The other issuers of Elements notes have also not fared well. In October, the five Deutsche Bank (NYSE:DB) sponsored currency notes were withdrawn from the NYSE due to insufficient trading volumes. The Deutsche Bank stated in the press release that it will continue to make bids for the securities, but is not required to do so. More recently, Credit Suisse (NYSE:CS) delisted three of its commodity-based Elements due to lack of assets and trading volume.

Alternatives
Given the wishy washy nature of the Elements line of products and the added general credit risk of exchanged traded notes, investors wanting commodity exposure should stick to the ETF form. There are several good broad-based choices. From the popular iShares line, the S&P GSCI Commodity-Indexed Trust (NYSE:GSG), follows 24 different futures contracts with a 65% weighting towards energy. The fund charges a modest 0.75% in expenses. The more popular, via its larger trading base and assets under management, PowerShares DB Commodity Index Tracking Fund (NYSE:DBC) follows the six most heavily traded futures contracts on NYMEX. These include light sweet crude, gold, wheat, corn, aluminum and heating oil. These products are structured as Limited Partnerships, so investors will get a K-1 statement come tax time, but that small headache is worth it for the "safety factor" of owning the ETF form. (Learn more in Discover Master Limited Partnerships.)

The Bottom Line
Jim Rogers is right on the money when it comes to commodity investing. Increasing inflation and the growth of foreign and emerging nations will drive the price of hard assets up for a long time. Individual investors should have some exposure in their portfolios. However, given the credit mess and the Elements exchange notes recent problems, I think investors are better suited elsewhere, namely the commodity ETFs. Now if we could only get someone to create an exchange fund based on the Rogers International Commodity Index, we would be all set.

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