Many leading economists believe that we are in for a slow, painful crawl out of recession however, do not panic, one can turn to commodities and profit from the upcoming inflation cycle. Commodities? The high-risk , high reward, high stakes, leveraged to the nth game and the comfy domain of multimillion dollar hedge fund mangers? Those commodities you say? Well not exactly, but close enough to appeal to the masses as efficient trading vehicles:
Commodity ETF’s & ETN’s!
An Exchange-Traded Fund (or ETF) is an investment vehicle traded on , much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of stock exchanges the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.
Technology Exchange Traded Funds (ETF’s) led the way up in 2006 and 2007 and led the way down in 2008. Commodities have been in a secular bull market since 1999, recently we witnessed a healthy correction and retracement and are now starting to move north again led by crude oil and gold, so it should be no surprise that they are charging ahead of the market averages again and I expect this trend to continue during the balance of 2009 and more so into 2011.
Buying and selling Commodity Exchange Traded Funds (ETF’s) and Exchange Traded Notes(ETN’s) are as easy as buying and selling common stock and can be done through any registered and licensed brokerage firm. Unlike commodity futures contracts these commodity ETF’s & ETN’s, are not subject to margin calls and/or taking physical delivery of said commodity. Whew! My neighbors kid is a pyro who plays with matches and a 42,000 gallon delivery of Unleaded Gasoline arriving at my home would definitely blow…
There are several popular commodity ETF’s & ETN’s out there and mixing a few into your portfolio will not only offset some of the potential losses associated with inflation cycles but allows for some re-balancing and diversification during these uncertain times. For the first time in over 50 years, the US Federal Reserve with a slew of other central banks in tow, embarked on a money printing spree that will go down as the most single handed reason for the upcoming inflation, let me take that back, hyper-inflation! There will be very few places to hide and in times of inflation, historically, the only refuge has been commodities, as a true hedge against inflation, best highlighted by gold and silver. That said, lets examine some new popular commodity ETF’s & ETN’s:
Broad Commodity ETFs/ ETN’s
SPDR Gold Trust ETF (AMEX: GLD); 52 Week High / Low 98.99 / 68.81
The investment seeks to strive to reflect the performance of the price of gold bullion, less the Trust’s expenses. The Trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the Trust terminates and liquidates its assets, or as otherwise required by law or regulation. The Trust is not managed like an active investment vehicle, and it’s not registered as an investment company under the Investment Company Act of 1940.
iShares Silver Trust ETF (AMEX: SLV); 52 Week High / Low 17.68 / 8.45
The objective of the investment is to reflect the price of silver owned by the trust less the trust’s expenses and liabilities. The fund is intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver. Although the fund is not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market.
iPATH DJ-AIG Platinum ETN (AMEX: PGM); 52 Week High / Low 44.13 / 18.96
The investment seeks to replicate, net of expenses, the Dow Jones-AIG Platinum Total Return Sub-Index The index is intended to reflect the returns that are potentially available through an unleveraged investment in platinum futures contracts as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.
iPATH Goldman Sachs Crude ETN (AMEX: OIL); 52 Week High / Low 76.63 / 14.55
The investment is linked to the performance of the Goldman Sachs Crude Oil Return Index and reflects the returns that are potentially available through an unleveraged investment in the futures contacts comprising the index plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts. The index is derived from the West Texas Intermediate (WTI) crude oil futures contract traded on the New York Mercantile Exchange.
iPATH AIG Ntrl Gas Return SB Idx (AMEX: GAZ); 52 Week High / Low 63.34 / 14.07
The investment seeks results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones-AIG Natural Gas Total Return SubIndex. The fund is designed to reflect the performance of natural gas. The index is composed of the Henry Hub Natural Gas futures contract traded on the New York Mercantile Exchange.
iPath DJ-AIG Coffee ETN (AMEX: JO); 52 Week High / Low 49.79 / 32.40
The investment seeks to replicate, net of expenses, the Dow Jones-AIG Coffee Total Return Sub-Index. The index is intended to reflect the returns that are potentially available through an unleveraged investment in coffee futures contracts as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.
iPath DJ-AIG Cocoa ETN (AMEX: NIB); 52 Week High / Low 47.00 / 30.21
The investment seeks to replicate, net of expenses, the Dow Jones-AIG Cocoa Total Return Sub-Index. The index is intended to reflect the returns that are potentially available through an unleveraged investment in cocoa futures contracts as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.
iPath DJ-AIG Sugar ETN (AMEX: SGG); 52 Week High / Low 57.65 / 36.36
The investment seeks to replicate, net of expenses, the Dow Jones-AIG Sugar Total Return Sub- Index. The index is intended to reflect the returns that are potentially available through an eraged investment in sugar futures contracts as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.
The investment seeks to replicate, net of expenses, the Dow Jones-AIG CottonTotal Return Sub-Index. The index is intended to reflect the returns that are potentially available through an unleveraged investment in cotton futures contracts as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.
iPATH AIG LiveStock Return SB Idx (AMEX: COW); 52 Week High / Low 45.15 / 27.34
The investment seeks results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones-AIG Livestock Total Return SubIndex. The fund is designed to reflect the performance of livestock. The index is composed of two futures contracts, lean hogs and live cattle.
iPATH DJ AIG Grains TRUST (AMEX: JJG); 52 Week High / Low 64.15 / 32.42
The investment seeks results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones-AIG Grains Total Return Sub-Index. The fund is designed to reflect the performance of grains. The index is composed of three futures contracts, corn, soybeans and wheat.
Tax Advantages with Commodity ETFs / ETN’s
iPath DJ-AIG Cotton ETN (AMEX: BAL); 52 Week High / Low 46.65 / 23.19
As luck would have it ETF’s are also quite tax-efficient. Because of the way they are created and redeemed, they allow an investor to pay most of his capital gains upon final sale of the ETF, delaying it until the very end. There is no way to avoid capital gains, but delaying it is valuable because the amount that would have been paid to taxes can continue to accumulate wealth. Exactly how much an investor benefits after-tax depends on their marginal tax rate, the return of the investment, and how long they hold the investment. Overall, ETF’s are similar to tax managed index mutual funds, slightly more efficient than standard mutual funds, and significantly more efficient than actively managed mutual funds. How is it ETFs are so efficient? Through a regulatory loophole, ETF’s are considered to be created by trading equivalent certificates (the ETF for the many stocks that make up the basket) in what is called an in-kind trade. This exchange of essentially identical items does not trigger capital gains, according to the IRS. Traditional mutual funds must go into the open market and exchange cash for stocks and vice versa, which trigger realization of gains. It’s a subtle difference, admittedly, but which results in an advantage for the ETF investor. Remember,as always, there are exceptions.
So…
With looming inflation out there it is easy to construct various scenarios from mildly bullish to very bullish for most commodities. Commodities are today’s real wealth, paper wealth is out! Unfortunately, for most of us, financial brokerage firms do a lousy job of exposing it’s client base to alternative investments and g-d forbid investments that might actually profit during turbulent times, for retail brokers, it’s difficult for them to converse with their clients about market corrections, bear markets or inflation scenarios, it is always rosy and bullish on Wall Street. They will average you down in a stock from $34 down to $19, then blame it on the economy instead of admitting they were wrong. Remember, as in any endeavor, education is the key to success and being a little bit of a constraint also helps. In a capitalistic society, such as ours and others, the masses can’t be right! Do your homework… add a little gold or coffee to your portfolio, it is now painless.