The U.S. government, through its Commodity Futures Trading Commission (CFTC), has recently been cracking down on speculators artificially inflating the price of oil, natural gas and other commodities. However, exchange traded funds (ETFs) tracking various commodity futures, which have become extremely popular with smaller retail investors, are feeling the direct wrath of the CFTC. These funds pool money in order to make one-way bets, up or down, on a basket of various commodities and are a great way to hedge against inflation.
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The increased regulation by the CFTC is causing havoc in these funds. By proposing increased position limits on ETFs, such as United States Oil (NYSE: USO), the CFTC hopes to limit the impact that these ETFs have on the price of the commodities. Several of these funds now trade at premiums to their net asset values, the PowerShares DB Crude Oil Double Long ETN (NYSE: DXO) was forced to close, and two of the oldest funds, PowerShares DB Agriculture (NYSE:DBA) and PowerShares DB Commodity (NYSE: DBC) have been reconfigured to add additional commodities diverging from their original focus.
Commodities are becoming an important component in investor's portfolios. As a planet we are experiencing a population explosion, with much of that growth stemming from emerging parts of the world. As emerging markets grow and become richer, their demand for more quality goods amplifies, appetites change and energy consumption increases. By investing in natural resources, a portfolio can tap into that growth.
Equities-based commodity products allow investors to potentially gain from resource exposure without dealing with the continuing CFTC futures problems. Equities are not a one-for-one replacement, as broad stock market problems can affect their pricing. But the long-term correlation between natural resource stocks and their commodities spot price are pretty good. And in more recent years, equity-based ETFs have tracked spot prices better. For example, the futures-based S&P GSCI Commodity Index (NYSE: GSG) has delivered a spot return through September of 33%. However, when you factor in for contango, the spot return drops to just 4.7%. Compared to the equity-based, Market Vectors RVE Hard Assets Producers ETF (NYSE: HAP), which comes closer to spot pricing at 35%.
Natural Resource Fund Picks
Investors wanting exposure to gold can choose the Market Vectors Gold Miners ETF (NYSE: GDX). The fund provides access to 32 different gold mining companies as well a historical hedge against volatility in general financial markets and inflation. The fund bestows just a 0.25% correlation to the S&P 500 (NYSE: SPY). The fund has performed admirably, returning 35% year to date as gold has risen to historic levels.
The Thomson Reuters/Jefferies CRB Global Commodity Equity Index ETF (NYSE: CRBQ) is the newest entrant into the equity commodity space. The fund is a broad-based fund covering 145 companies that produce energy, agricultural commodities, and raw/precious metals. CRBQ has already attracted an average daily trading volume of 77,000 shares and is experiencing net inflows. Jefferies has also recently launched the Jefferies TR/J CRB Global Agriculture Equity Index Fund (NYSE: CRBA) and the Jefferies TR/J CRB Global Industrial Metals Equity Index Fund (NYSE: CRBI). These funds are designed to track agricultural resources as well as the base metals.
For energy exposure, investors can purchase the Energy Select Sector SPDR (NYSE: XLE). The fund tracks the energy sub-sector of the S&P 500, including oil, natural gas, coal and oil service stocks. The fund tracks the price of energy pretty well and has returned nearly 15%, as the price of oil has returned above $50 a barrel. The fund also provides an income option with a dividend yield of 2%. This is a feature that commodities future funds cannot offer.
Commodity exposure for a portfolio is becoming increasingly important for the average retail investor. However, with the recent steps by the CFTC to step up regulation into the trading of futures ETFs, regular investors are left at a disadvantage. By shifting our focus to equity driven commodity exchange traded funds we can side step many of the new regulations while still gaining most of the benefits of natural resources. The ETFs in this article can provide a stepping stone for further research for a commodity position. (To learn more, see ETFs Provide Easy Access To Energy Commodities.)
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