Hard Assets Still Make Sense

While the headlines focus on the problems stemming from the European Union, Greece and the rest of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), longer-term investors currently have the opportunity to pick up some good assets for cheap that could strengthen portfolios for years to come; in this case, commodities and hard-asset producers. Commodities overall have fallen from their highs as evidenced by broad-based funds such as the PowerShares DB Commodity Index (NYSE: DBC) sinking toward their 52-week lows amid the Euro-zone crisis. Commodities still make sense for portfolios as they are one of the main catalysts for a growing global economy.

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Economic Building Blocks

Exploding populations worldwide have added increased pressure on the planet's natural resources. This insatiable demand for hard assets is touching all aspects of modern living. Metals and other materials are needed to build infrastructure. Vast amounts of energy resources are needed to provide electricity and to power transportation. Soft commodities, such as corn and wheat, are needed to meet the world's growing middle class demand for meat and other foods. Accounting for more than 14% of the world's economic output, commodities form the basis for all goods and services.

In addition, the crisis of 2008 and current market maelstrom have created a potential situation where long-term global demand is not in sync with the supply. With prices falling in some commodities below their marginal cost of production, some projects have become uneconomical. Mines have been closed, and plans for future projects have been shelved. This can act as a coiled spring toward prices when demand returns. New mines typically take 10 years from planning to producing stages, and this lag can significantly affect prices.

Finally, adding commodities to a portfolio can have other benefits as well. As an asset class, they offer diversification away from stocks and bonds. Providing low correlation to other asset classes, natural resources can outperform other investments in down periods and reduce the overall volatility of a portfolio. Moreover, hard assets can help hedge against the nasty effect of inflation on a portfolio.

Broad Bets

Hard asset companies make up nearly 15% of the world's market cap, so individual investors do have a lot of choice within the sector. However, as an overall arching theme, broader is better.

Jim Rogers is no stranger to commodity investing. The guru is one of the main advocates for hard-asset investing and has helped develop a few products to bring it to the mainstream. The Market Vectors RVE Hard Assets Producers ETF (NYSE: HAP) was created to provide a one-stop shop for investors. The exchange-traded fund (ETF) follows all the major areas of commodity investing, from energy production to agriculture. This also includes a weighting toward alternatives such as water and renewable energy. Top holdings in the ETF include seed specialist Monsanto (NYSE: MON) and oil giant Chevron (NYSE: CVX). The ELEMENTS Rogers International Commodity ETN (NYSE: RJI) tracks a basket 37 commodity futures including crude oil, corn and some more out-of-the-ordinary choices such as rubber and adzuki beans.

Jefferies TR/J CRB Global Commodity Equity (NYSE: CRBQ) follows 150 different companies engaged in producing commodities, however it does not include any weightings toward water or alternative energy. Investors could use the First Trust ISE Water (NYSE: FIW) and PowerShares WilderHill Clean Energy (NYSE: PBW) to fill those gaps. Overall, the fund is quite global with only 35% of the holdings coming from the United States. CRBQ charges 0.65% in expenses.

The IQ ARB Global Natural Resources ETF (Nasdaq: GRES) is unique in that in addition to following a basket of global commodity producers, the fund adds short exposure to the S&P 500 and MSCI EAFE Indexes. This isolates the return generated through movements in commodity prices. In essence, you get a product that tracks futures, but it uses stocks to do so. The fund charges 0.75% in expenses.

Bottom Line

Investing in hard assets makes sense for long-term portfolios. Aside from the inflation-fighting benefits, the world's expanding population will put continued pressure on the finite amount of resources our planet holds. Investors could use the current market's recent slump to add a broad basket of hard-asset producers to their portfolios. The previous examples are just a few of the choices available to investors in the commodity sector. (These funds make investing in gold, oil or grain an easier prospect. Check out Commodity Funds 101.)

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