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Tickers in this Article: WCAT, GDXJ, IAU, CVX, MMR, PXP, JEF, GRS
With the recent retrench of the overall stock market over the last few weeks, a long-term buying opportunity has emerged in natural resources. The broad based iShares S&P North American Natural Resources (NYSE:IGE), has fallen in January from $37 down to barely $32 a share. Investing in natural resource stocks makes sense as a longer-term play for several reasons.

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Why Add Commodities
?
Commodities can offer diversification from stocks and bonds. As emerging markets grow and become richer, the demand for more quality goods amplifies, appetites change and energy consumption increases. Providing low correlation to other asset classes, natural resources can outperform other investments in down periods and reduce the overall volatility of a portfolio.

In addition, commodities can keep inflation at bay. Inflation protection has been brought to the forefront as many investors worry about the large increases of money supply many national governments are printing in order to stem the financial crisis. (Learn more about risks of inflation to your portfolio in Coping With Inflation Risk.)

Thinking Small with Your Commodities
While investing in a major international energy concern such as Chevron (NYSE:CVX) can provide stable revenues and rising dividends, thinking small might be a better bet for your commodity dollar or at least a portion of it. Economists Eugene Fama and Kenneth French's study concluded that over a 50 year period from 1956 to 2005, small cap stocks have beaten large caps by nearly 4% annually. In the commodity realm it is no different.

Exploration natural resource companies serve as one of main providers of new mineral deposit supplies. These companies find new deposits and bring them into production. Major producers see these junior discoverer corporations as a way to add to their overall reserves and will often partner with or buy out these mid-tier producers.

In addition, these junior E&P firms may provide additional portfolio increases. After all, it only takes one gusher or vast gold deposit to turn a small company into a superstar and send its stock price rising. The recent Davy Jones discovery in the Gulf of Mexico and the share prices of McMoRan Exploration (AMEX:MMR) and Plains Exploration & Production (AMEX:PXP) are perfect examples of this.

Two Small Cap ETF Picks
While it may take the "fun" out of individual small cap prospecting, exchange-traded funds make it easy to add a dose of natural resource speculation. Two new funds exist and allow investors to participate in the space.

Boutique firm Jefferies (NYSE:JEF) recently launched the Wildcatters Exploration & Production Equity ETF (NYSE:WCAT) tracking oil and gas E&P stocks based in the United States and Canada. Stocks within the index fall between market caps between $200 million and $2 billion and no stock may account for more than 25% of the fund.

The ETF follows 55 different "wildcat" firms with around 66% of holdings in natural gas based E&Ps. This could bode well if the United States moves forward with any plans to make natural gas a bigger portion of its energy usage pie. Volume is terrible for WCAT, but should increase as it attracts more assets. The ETF charges 0.65% in expenses.

As one of the more successful ETF launches to date, as the price of gold (NYSE:IAU) has sky rocketed, the Market Vectors Junior Gold Miners (Nasdaq:GDXJ) gives investors a chance to participate in the entry level gold, silver and copper miners. The fund has expanded adding 18 additional holdings, bringing its total investment to 56. This includes investments in U.S. listed stocks such as Gammon Gold (NYSE:GRS) and Canadian listed companies as well. The fund has $650 million in assets and charges 0.68% in expenses.

The Bottom Line
The recent market stumble has left some sectors ripe for investment. With its good long-term prospects, the natural resource sector and its underlying companies are compelling. Investors wanting to diversify their commodity portfolio and possibly gain some extra volatility may want to take a look at small cap E&P firms. Both WCAT and GDXJ are great ETFs for adding these small stocks to a portfolio.

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