Throughout 2010 and the beginning half of this year, commodities were one of the strongest performing asset classes. Then the bottom dropped out. Worries about China's slowing appetite for natural resources, coupled with growing concerns about Europe's burgeoning debt crisis, took the wind out of the sails of the sector. Investors dumped risk assets and flocked to the U.S. dollar and treasuries, which exacerbated the fall in hard assets. However, while the headlines continue to focus on the problems with the PIIGS, slow growth and debt issues, longer focused investors can now add some quality exposure to commodities at real fire sale prices.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Cheap Prices, Strong Demand
For portfolios, the commodities sector continues to offer a bargain relative to long term demand trends. The recent short- to medium-term global macroeconomic worries has caused both the producers and physical goods to crater. Overall, the GreenHaven Continuous Commodity Index (ARCA:GCC), which tracks 17 equally-weighted commodity futures, is down around 5.4% this year. (For related reading, see 6 Popular ETF Types For Your Portfolio.)

Despite the short term stumble, the long term picture for the asset class is rosy. The United Nations predicts that the global population will increase by 11% leading up to the year 2020 and will jump by 20% by the time we hit 2030. This population growth will continue to place a greater strain on the limited supplies of the world's natural resources. Metals and other materials will be needed to build vital infrastructure. Vast amounts of energy resources are needed to provide electricity and to power Western-style transportation. Tons of soft and agricultural commodities will be required to meet the world's growing middle class demand for meat and other foods. As emerging and frontier markets continue to grow, it is the commodities sector that will see gains as well.

In addition, various governments' quantitative easing, stimulus and money-printing programs designed to encourage economic growth have produced some unintended consequences; an ever-increasing money supply and raised inflation expectations. Hard assets continue to hold appeal in the long run, as investors are able to protect themselves from price changes in real goods. While inflation has generally been mild, so far, the recent rout in commodities can allow portfolios to add some future inflation production on the cheap.

Gaining Exposure
Making up nearly 15% of the world's market cap, there are plenty of individual hard asset companies to choose from. However, given the vast variety of firms across the various subsectors, a broader approach may be better. Luckily, the recent exchange traded fund boom has opened up a wide variety of ways to play the hard asset sector. Here are a few picks.

Holding roughly 340 securities across six different hard-assets sectors, the Market Vectors RVE Hard Assets Prod ETF (ARCA:HAP) provides one of the widest swaths of commodities funds. Heavy weights such as BHP Billiton (NYSE:BHP) and Exxon (NYSE:XOM) dominate the top holdings, but the fund does include exposure to water and renewable energy firms. This added exposure has helped the fund outperform its two main rivals, the WisdomTree Global Natural Resources (ARCA:GNAT) and the SPDR S&P Global Natural Resources (ARCA:GNR). Expenses run a cheap 0.59% and the index that the fund tracks was developed by hard asset guru Jim Rogers.

One of the more unique offerings in the commodities space is the IQ Global Resources ETF (ARCA:GRES). The fund provides exposure to a basket of hard asset producers, but then shorts 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 commodity futures, but it uses stocks to do so. This eliminates the hassle of dealing with a K-1 statement come tax time, unlike investors in the more popular PowerShares DB Commodity Index (ARCA:DBC) and iShares S&P GSCI Commodity-Index (ARCA:GSG) funds. The IQ fund charges 0.75% in expenses. (For related reading, see Using ETFs To Build A Cost-Effective Portfolio.)

The Bottom Line
For investors, the recent rout in the commodity markets can provide just the opportunity they are looking for. With the long term trends still in place, the sector is ripe for the picking. The previous broad exchange traded funds, along with the Jefferies TR/J CRB Global Commodity Equities (ARCA:CRBQ) are great ways to add exposure to the sector.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  2. Savings

    Do Natural Gas Prices Always Follow Oil Trends?

    Prices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
  3. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  5. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  6. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  7. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  8. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  9. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!