Investors Again Seeking Low-Risk Commodities

By Bob Frick
Kiplinger's Personal Finance
Sunday, June 14, 2009

As investors spy a growing number of hints that the economy may be nearing a bottom, they are regaining their appetite for commodities. Prices for gold and oil have shot up recently, and the broad-based Dow Jones-UBS Commodity Index, which plunged 54 percent from July 2008 through February, has since rebounded about 20 percent.

As the numbers show, commodities are notoriously volatile and fickle, making it hard for the average investor to make money off of them. After years of sharp ups and downs, many investors find that they've earned nary a nickel from their commodity holdings. But a strategy that a couple of fairly new investment vehicles are using milks the ups and the downs to deliver enviably stable and solid returns.

Commodities provide a hedge against inflation, and commodity prices don't move in tandem with stock or bond prices. So adding commodities to your portfolio should reduce its volatility while at the same time giving you an opportunity to boost returns.

The new investments play off of Standard & Poor's Commodity Trends Indicator, or CTI, which bets on some commodity prices to rise and others to fall, depending on where the indicator's caretakers think a commodity is in its price cycle. So at some point, the indicator might call for holding futures contracts that will profit from corn prices rising (a "long" position), while at the same time it might call for selling short silver futures to bet on a drop in the metal's price.

From the CTI's creation at the start of 2004 through May 29, it more than doubled, while Standard & Poor's 500-stock index dropped 8 percent. Over the same period, the two most widely used commodity indicators -- the Dow Jones-UBS index and the S&P GSCI Commodity Index -- rose nearly 8 percent and fell 6 percent, respectively (both the DJ-UBS and S&P indexes measure performance of a basket of commodities; neither engages in short selling).

Two publicly available investments mirror the CTI. One is the Direxion Commodity Trends Strategy Fund (symbol DXCTX), a traditional mutual fund. The other is an exchange-traded note, Elements S&P CTI ETN (LSC).

Annual expenses for the Direxion fund are stiff, at nearly 2 percent. The ETN's expenses are fairer, at 0.75 percent per year. But ETNs come with a major drawback: They are essentially debt instruments of the sponsor, meaning that you could lose some or all of your money if the issuer fails.

A better option is on the way. Claymore Securities has filed papers to start an exchange-traded fund based on the CTI strategy. A Claymore spokesman says that the ETF will be available this summer and that its annual expenses will be less than 1 percent.


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