One of the fastest growing sectors for new investment has been the rise of commodities based funds. Over $100 billion went into such investment vehicles through 2009 and so far 2010 is shattering that number. However, most investors' hard asset allocation lies within a few commodities. The average portfolio will hold a handful of exchange traded funds, mostly focusing on energy and precious metals. The SPDR Gold Shares (NYSE:GLD) is the second largest exchange traded fund of any kind, with over $50 billion in assets. Both the United States Natural Gas (NYSE:UNG) and United States Oil (NYSE:USO) trade tens of millions of shares each day, and broad-based funds such as iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG) are quickly gaining popularity. Nevertheless, with these heavy allocations towards a few commodities investors might be missing out on some interesting opportunities in the sector.
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Exploding populations and increasing complex and modern standards of living require more and more of these resources. Energy is needed to create electricity and power transportation. Metals and various materials are needed to create infrastructure and enormous amounts of food are needed to feed the expanding populous. Growing demand will ultimately push prices up over the long term. This demand quotient, plus the asset type's ability to help cool inflation in a portfolio and the over-all diversification effects, makes interest in commodities certainly warranted.
Adding Other Opportunities
The previously-mentioned iShares GSCI Commodity Trust is weighted 71.3% towards the energy sector. While that may or may not be a bad thing, depending on future trends, investors using it as their only play maybe missing out on some interesting asset plays. Commodities in general are a collection of unrelated market markets that we tend to lump together. Adding individual commodities exposure may help boost returns and smooth out the weightings. Here are some of the more interesting picks.
Investors may want to bypass their morning latte from Starbucks and order one for their portfolios instead. Decreasing supply and growing demand for coffee is having its way with bean prices. Up over 9.8% in less than a week, coffee futures are surging. Lower output in Africa and Latin America, combined with dwindling global stockpiles, have analysts estimating that coffee prices may jump to nearly $3 a pound from current $1.159 levels. The iPath DJ-UBS Coffee ETN (NYSE:JO) is the only pure play on the bean and is up 11.2% in about a month.
After an amazing 2009, in which prices doubled, sugar is facing a supply glut and falling prices. During the previous year, several factors, including drought and storms, caused a dip in production. This year is anything but. India, Brazil and China are all citing increased production, sending raw sugar futures down 45% year to date. This drop-off in prices could open up a contrarian play as the world's sweet tooth continues to grow, as well as the increased production of sugar-based ethanol. The iPath DJ-UBS Sugar ETN (NYSE:SGG) offers access to the sweet stuff.
As both industrial and precious metals, platinum and palladium are some of the most volatile minerals in terms of price. Both are used in jewelry, bullion and industrial items such as catalytic converters and batteries, the two metals should benefit long-term, as investors flock to precious metals for safety. The industrial uses could help buoy prices. Investors may want to shift some of their gold allocation to either the ETFS Physical Platinum Shares (Nasdaq:PPLT) or the ETFS Physical Palladium Shares (Nasdaq:PALL). Both of these funds carry an expense ratio of 0.60%.
The Bottom Line
Commodities are quickly becoming a more important part of investor's over-all portfolios. However, most of their allocation is spread among a few asset types with heavy weightings towards energy and gold. However, there are plenty of other hard assets that maybe of interest to investors and their portfolios. (These diverse asset classes can provide downside protection AND upside potential. Find out how to use them. See Commodities: The Portfolio Hedge.)
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