The introduction of exchange traded products forever changed the face of investing. As these products began to grow in popularity, their reach moved into all corners of the investing world, including commodities. Now, there are dozens of commodity ETFs to help investors gain both futures-based and physically backed exposure to their favorite hard assets. But there are still a number of commodities and strategies that have yet to be tried using an ETF structure. Below, we outline five potential commodity ETFs that could be very useful for investors [for more commodity ETF news and analysis subscribe to our free newsletter].
Timber, while it may sound like a relatively unpopular commodity for investing, has been one of the most successful hard assets over the past hundred years. The price of timber has risen by an average of 5% for the past century. Since the beginning of the 20th century timber has outpaced the S&P 500 and has risen by approximately 15% each year since 1987 (save one bad year during the U.S. housing crash).
Best of all, the fund would be relatively easy to introduce given that there are both random length lumber and softwood pulp futures offered on the CME. Note that as a futures product, this potential ETF would be primarily used by traders looking to bet on one of the world’s most widespread commodities. Depending on which futures the fund would track, we have two enticing tickers in mind; TMBR and PULP. Feel free to use those at your discretion [see also 50 Ways To Invest In Agriculture].
First things first, there is a biofuels ETF (FUE) in existence, but it simply tracks the commodities that are often used for biofuels, not the fuels themselves. Ethanol is one of the most popular alternative fuels in the world, giving it a solid base for investment. This commodity is produced using both corn and sugar, so those two agricultural commodities are going to be some of the biggest price drivers.
The CBOT and the NYMEX both have their own ethanol contracts, allowing the potential ETF to choose from whichever one fits better with investors. As far as potential tickers are concerned, it appears as though FUEL is currently available (as it was abandoned earlier this year), giving a catchy name to this unique fund [see also Invest Like Jim Rogers With These Three Agriculture Stocks].
Rare Earth/Strategic Futures
Rare earth/strategic metals have been surging in popularity in recent years as their use in the technological landscape continues to grow. Uses of rare earth metals include hybrid cars, wind turbines, flat screen televisions and cellular phones. The majority of these elements are produced in China, as the world’s most populous nation is chock full of these coveted assets.
The most difficult part about creating this fund would be finding all of the various futures contracts to invest in. For starters, futures to the majority of these metals either do not exist or are extremely difficult to come by. The fund would be unable to invest in contracts from just one provider, which is probably the reason why there is such a large barrier to entry for the time being. But if these metals continue their current growth and use in the industrial world, it may not be long before we see more widespread use of futures contracts for metals like Cerium and many others. Of course, it also doesn’t hurt that the ticker RARE is still available.
Diamonds are very popular items among wealthy investors and soon may be popular among investors all around the world. The biggest barrier to entry for diamond investing, other than the exorbitant costs, is the fact that there is no set pricing system for these minerals; each stone is unique and therefore priced differently. But that may all change soon, as a Chicago-based company has laid out initial plans for a diamond index as well as potential funds that could go along with it.
A diamond ETF could be very useful for production companies looking to hedge against snags and unforeseen issues in mining. But a fund would also democratize this mineral and make it possible for even the smallest of investors to add diamond exposure to their portfolio. We like DIAM for a potential ticker for this fund.
Yes, weather is technically not a commodity, but it has such a vital role in the pricing of commodities as well as the trends that develop in their trading. Just look at this year. Severe heat and drought caused natural gas futures to soar more than 70% and likewise, grain futures went on a tear. The ability to use weather futures to hedge against unfavorable conditions [see also Panic, Drought, Massive Gains For The Grains].
This product would be perfect, as it would be extremely volatile and would offer active traders a great way to make speculative bets. We would equate such a fund to a somewhat predictable VIX product, as one could at least check the forecast (depending on the contracts) prior to investing, though volatility would still be present. Our favorite available ticker is RAIN.
Disclosure: No positions at time of writing.