For many investors, commodities have become the go-to investment of the last few years. After all, booming populations and rising global wealth have put a variety of pressures on the planets natural resources. As the supply and demand imbalances continue to be skewed, higher prices will undoubtedly be on the horizon. In order to profit from this trend, funds such as the Jefferies TR/J CRB Global Commodity Equities (NYSE:CRBQ) have become portfolio necessities. However, despite the long-term potential, many analysts feel that investor enthusiasm has pushed prices for the asset class into the realm of speculation. For investors still interested in the commodities space, focusing their research on one of the investing world's quirkier securities types could provide the safety net they need.
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Hard Assets on Sale
Though often wildly misunderstood, closed-end funds (CEF) may be the ticket to hard asset and commodities investing. After an initial IPO, closed-end funds trade on the stock market with a fixed number of shares. Investors can think of them as a cross between ETFs and mutual funds. However, due to their fixed share nature, CEFs often trade for discounts to their net asset values, allowing investors to pick up stocks for pennies on the dollar. For example, if a closed-end fund is trading at a 10% discount to its net asset value (NAV), you effectively get a dollar's worth of assets for 90 cents. (For further reading into CEFs, read Open Your Eyes To Closed-End Funds.)
In the case of commodities investing there are several closed-ended funds that trade at deep discounts to their underlying holdings. As more metals are needed for infrastructure development and more wheat is needed to feed the expanding populations, investors using these eccentric security types can still participate in the long-term commodities bull market. By buying the hard asset firms at a major discount, you can have your cake and eat it too. Investors have the potential for outsized gains if prices skyrocket, but also have downward protection knowing they purchased these assets at a deep discount to what they are worth.
The Hard Asset Bargain Aisle
Hard asset companies make up nearly 15% of the world's market cap, so individual portfolios do have a lot of choice within the sector. However, investors may want to bypass ETFs like the iShares S&P North American Natural Resources (NYSE:IGE) in exchange for deeply discounted closed-ended funds. Here are some top picks.
As investors have sought safety in gold, many have also looked at gold mining stocks for additional leverage. Trading at almost a 10% discount to its NAV, ASA Limited (NYSE:ASA) holds 28 different precious metals miners including mainstays like Goldcorp (NYSE:GG) and Barrick Gold (NYSE:ABX) as well as some exposure to gold bullion. Overall, the fund has performed well since its inception in 1958, turning $10,000 into $2.5 million, and over the last ten years has produced 19% annualized returns at market price. ASA makes an interest alternative to the mainstream precious metals funds like the PowerShares Global Gold & Precious Metals (Nasdaq:PSAU). (Read why gold is a safe investment in 8 Reasons To Own Gold.)
Initial investors in the BlackRock Resources and Commodities Trust (NYSE:BCX) have seen their investments vanish to the tune of nearly 30% since the fund's IPO in March. For the rest of us, buying the fund today nets a 9.98% discount to its NAV and as well as a 9.76% distribution yield. The fund features a variety of hard asset firms and utilizes an options writing strategy to generate high income. BlackRock also offers its Ecosolutions Trust (NYSE:BQR) which follows renewable energy, agriculture and water-related commodities firms. The Ecosolutions Trust trades at an 8.35% discount to NAV. (For an introduction to the commodity market, read How To Invest in Commodities.)
Finally, commodities futures have also found their place in many portfolios with the PowerShares DB Commodity Index Tracking (NYSE:DBC) leading the way. The Nuveen Diversified Commodity (NYSE:CFD) allows investors to buy into an actively-managed resources futures strategy at a 5.28% discount.
The Bottom Line
As our growing population continues to put pressure on the planets natural resources, commodities will remain an attractive investment. However, recent investor enthusiasm has pushed prices for many of these assets into bubble territory. By using closed-ended funds such as Petroleum & Resources (NYSE:PEO), investors can buy these assets at a discount.
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