Investing in commodities has certainly picked up in recent years, but it seems that the overall industry has begun to experience some growing pains. As is common with newer investment types (not that commodities are new, but their heavy popularity is), analysts will lash out and tell investors why this asset class is bad news. Such is the case with a recent article in the Wall Street Journal entitled “The Case Against Commodities“. This piece outlines a number of the dangers and issues that come along with commodity investing. But investors shouldn’t take it at face value, as there are a number of factors that WSJ neglected to mention [see also Three Reasons Why Gold Is Overvalued].
1. Commodity Investing Was Designed For Traders/Hedgers
It used to be that the only way to gain access to commodity investments was through complicated futures contracts, whose stipulations and requirements did well to scare off less-serious investors. The contracts were also used by farmers to hedge against rapidly changing crop prices and to ensure a certain value for key crops no matter what the spot prices were at harvest time. Back then, nobody had a problem with commodities as an investing asset class, as the only people using them were the ones that truly understood how to use them. But with the expansion of the commodity investing sector, the average Joe can now buy an ETF or stock that grants them exposure to these very same commodities. The issue here isn’t that the funds are bad investments, but that they’re used by those who do not fully understand them [see also 50 Ways To Invest In Gold].
Commodities feature hefty volatility and can turn on a moment’s notice, which is why they’re reserved for those willing to actively monitor positions. Assets like natural gas have come under fire for erasing gains in a portfolio, but the majority of these investments should measure their holding periods in minutes and hours rather than days and weeks. That’s not to say that these investments shouldn’t be held for a long period of time, they just need a watchful eye to ensure they are behaving rationally. For those willing to put their nose to the grindstone and closely watch their commodity investments, they can make a healthy return even in a long term scenario. But those who invest and fail to actively monitor will likely be crushed in the long run [for more commodity news subscribe to our free newsletter].
2. Commodity Returns Are Cyclical
Commodities tend to experience ups and downs based on market and global trends. Right now, for example, commodities are on their way down, but going back to active traders, a short position would be yielding handsome gains. Though the unsteady nature of these investments is ultimately addressed by WSJ, it is not fully explored. The author states that commodities have become popular in retirement portfolios, but simply do not belong there. On the contrary, a commodity investment can be a major boost to a retirement portfolio; they just need to be more actively monitored. If utilized properly, solid commodity exposure can yield benefits like inflation hedges as well as low correlation to equity markets [see also 25 Ways To Invest In Silver].
Still not convinced? Take a look at the returns in the DB Commodity Index Tracking Fund (DBC), a broad-based commodity product versus the S&P 500 over the past five years. DBC has shot up 11.23% while the S&P is down about 12%, rewarding DBC shareholders with a major boost to their smashed equity investments. Though most long-term investors do not want to keep a watchful eye on their portfolio, seeing the massive difference in these two returns may be enough to convince some that monitoring your commodity exposure will certainly be worth the hassle.
In another section of the article, the author states that corn prices nearly tripled between 2000 and 2010, while rye barely doubled, commenting on how quickly commodities can be phases out of their usefulness, as corn has become much more prevalent than rye. While this might be true, doubling or even tripling stock price between 2000 and 2010 was a massive feat, and one that the S&P 500 miserably failed to do. Other than a few diamonds in the rough, the majority of U.S. stocks finished out “The Lost Decade” relatively flat, while commodity exposure could have softened the blow [see also Inside Copper’s Plunge: How To Make A Play].
Along the same lines, the author makes his argument that commodities are constantly being phased in and out, citing whale oil as a once popular commodity that is now altogether useless. What the author fails to acknowledge is that while one commodity is phased out, another surges in popularity. When whale oil began to die down, petroleum and crude began to surge, and innovation in new technologies simply yield opportunities to get in on the ground floor of a new commodity. Again, this ties back to active trading or monitoring to decide when its time to sell and what to buy next.
3. What About Physical?
The majority of commodity investments are meant for traders, but there are a select few products that are designed specifically for buy and hold investors and their long-term portfolios. The author utilizes the last section of his article to cite the hellacious contango that a number of futures-based ETFs can exhibit. Again, an investor buying and holding (without keeping a close watch) a futures-based product simply does not fully understand what he/she is holding, and is making a fatal error. Though these ETPs come as an equity ticker, they need to be thought of as a futures product and as such should be traded accordingly [see also Three Ways To Play $2,000 Gold].
During this latter segment of the article, the option of physically-backed ETFs or even physical commodities is entirely overlooked. Physical products are intended to reflect the performance of the underlying commodity by simply holding something like silver in a London vault. These products are something of a rarity, because that can be effectively used in a long term portfolio and even for retirement purposes without careful monitoring. To prove this claim, let’s take a look at the trailing five year returns of SPDR Gold Trust (GLD) and iShares Silver Trust (SLV), two ETFs that invest in physical gold and silver respectively. GLD has brought gains of 184%, while SLV saw a boost of 172%, dwarfing the 12% loss in the S&P 500.
When it comes to bullion, you would be hard pressed to convince someone that the last ten years has been a terrible time to hold something like gold or silver. In 2000, and ounce of gold went for less than $500/oz. but is now trading for over $1,600/oz. Tripling your money in 10 years certainly isn’t an everyday feat and the power of these physical products and commodities should not be overlooked [see also Dividend Special: Top Companies In Every Major Commodity Sector].
Conclusion
The WSJ aimed to make a case against commodities, which it effectively completed. However, it left out a number of key points and factors that should be considered by all investors. For 95% of commodity investments, if you are not an active trader or have vast knowledge of the underlying asset, the security is probably not meant for you. But traders and complex investors have been generating astounding returns in the commodity world in the past (see Jim Rogers), and they will continue to do so for years to come [see also The Guide To The Biggest Companies In Every Major Commodity Sector].
[For more commodity ideas sign up for our free CommodityHQ newsletter.]
Disclosure: No positions at time of writing.
[...] Jared Cummans: Investing in line has positively picked adult in new years, though it seems that a altogether attention has begun to believe some flourishing pains. As is common with newer investment forms (not that line are new, though their difficult recognition is), analysts will lash out and tell investors since this item category is bad news. Such is a box with a new essay in a Wall Street Journal entitled “The Case Against Commodities“. This square outlines a series of a dangers and issues that come along with commodity investing. But investors shouldn’t take it during face value, as there are a series of factors that WSJ neglected to discuss [see also Three Reasons Why Gold Is Overvalued]. [...]
[...] Pharmaceutical companies have long been popular investments as they offer relatively inelastic products as well as strong dividend yields that give both growth and value investors something to buy into. As far as the ETF world is concerned, there are four products that allow investors to gain access to this investment class. But with the four products being very similar, it can be difficult to pick and choose one ETF over the other. While underlying holdings or investment strategies may be similar, the returns of these products has been drastically different over the last few years, which may swing investors one way or the other on these ETFs [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Solar power is an increasingly popular energy source as well as an investment option. The growing industry has led to a rapid adoption by citizens, businesses, and governments to incorporate solar panels on everything from parking meters to bridges. There are a wide variety of panels meant for small homes and businesses as well as entire grids and large buildings. As the industry continues to blossom, the cost of producing the panels has dramatically decreased and over the coming years is predicted to dip even more, perhaps making it a viable alternative to cheaper fossil fuels like crude oil and natural gas [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Matthew Bradbard is the president and founder of MB Wealth, a full service commodity brokerage firm. MB Wealth offers access to commodity markets as well as three different trading packages depending on your investment style. Mr. Bradbard also publishes weekly articles commenting on the state of commodities and how they tie with broader equity markets. Whether you are a seasoned futures trader, or a retail investor looking to hone in on the power of commodities, MB Wealth and Bradbard present themselves as an excellent resource [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] If Jim Rogers has taught us anything, its that agriculture exposure is a must for any investment portfolio. But buying corn or soybean futures and rolling on a steady basis seems impractical for keeping allocations to what might make up 1% of your overall holdings. Beyond futures products, there are a wide variety of equities tied to the agriculture sector, but picking the right one can be tricky business. Enter agribusiness ETFs. Products dedicated to offering exposure to a wide variety of firms tied to the agriculture sector, giving investors an equity spin on their favorite commodities like sugar, cotton, and cocoa [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] If Jim Rogers has taught us anything, its that agriculture exposure is a must for any investment portfolio. But buying corn or soybean futures and rolling on a steady basis seems impractical for keeping allocations to what might make up 1% of your overall holdings. Beyond futures products, there are a wide variety of equities tied to the agriculture sector, but picking the right one can be tricky business. Enter agribusiness ETFs. Products dedicated to offering exposure to a wide variety of firms tied to the agriculture sector, giving investors an equity spin on their favorite commodities like sugar, cotton, and cocoa [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Income investing is always a popular strategy for portfolio allocation that t is perhaps most effective in sideways markets, when few asset classes are generating stable returns. With today’s major indices swaying back and forth with each coming day, many analysts feel that we are indeed in a sideways environment, bringing value investing to the forefront. Of the numerous value options, few are as enticing as the Master Limited Partnership (MLP) sector. These products offer juicy dividend yields and make a play on the world’s insatiable appetite for fossil fuels [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Finally, note the expense ratio of DJCI; at just 0.50%, this product is one of the most cost efficient commodity ETPs on the market. In fact, this ETN is linked to the same index as the popular DJP, but charges 0.25% less than that fund [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Commodity investing used to be something that was left only for experts and farmers who fully understood the nuances of these trading tools. But in recent years the space has been cracked open with a number of mutual funds and exchange traded products hopping in on the action and increased popularity. Now, even the average Joe can gain access to something as obscure as cocoa futures through a single equity ticker. But it was before the widespread use of commodities that legends were born, as some of the world’s most famous businessmen made fortunes playing the commodity space, paving the way for future investors [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Today was another volatile session as markets opened down and were never able to fully recover, despite a nice uptick towards the end of the day. All in all, it was a pretty rough week as the first two days set a negative tone for the coming month despite Wednesday’s and Thursday’s gains. The Dow lost 61 points Friday, to finish out the week below 12,000 while the S&P fared a bit worse, surrendering 7.6 points to the choppy markets. Though oil was beat down mid-way through the trading session, the fossil fuel rallied to finish the day above $94 per barrel, while most other asset classes finished the day in the red [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] trading session, the fossil fuel rallied to finish the day above $94 per barrel, while most other asset classes finished the day in the [...]
[...] Bruno del Ama is the CEO of Global X Management, the New York-based ETF issuer behind several of the innovative exchange-traded products to hit the market in recent months, including the first ETFs offering investors exposure to Colombia and the Nordic region and the first and only uranium ETF on the market. He recently took time out of his busy schedule to talk about the nuclear energy industry, Global X Uranium ETF (URA), and more with CommodityHQ [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Bruno del Ama is the CEO of Global X Management, the New York-based ETF issuer behind several of the innovative exchange-traded products to hit the market in recent months, including the first ETFs offering investors exposure to Colombia and the Nordic region and the first and only uranium ETF on the market. He recently took time out of his busy schedule to talk about the nuclear energy industry, Global X Uranium ETF (URA), and more with CommodityHQ [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Interest in commodities as an investable asset class has been gradually climbing over the last several years, as new means of accessing these securities have turned investors on to the potential return enhancement and diversification benefits. While the potential rewards of investing in commodities are tremendous–as evidenced by the huge price run-ups over the last year–the risks are substantial as well. While commodities are increasingly ubiquitous and are relatively simple to identify or understand–everyone could identify corn or sugar–there are numerous nuances that complicate the process of establishing exposure to natural resources [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] As we enter the final month of the year, investors have plenty of things to digest. This past week has been one of the strongest in recent memory as euro hopes combined with positive U.S. data to push markets higher. Some of the biggest commodities on the week have been natural gas and crude oil. Natural gas in the U.S. has seen stockpiles hit historic highs as mild weather across the country has slaughtered demand for the commodity. Thursday saw inventories decrease to ease some concerns, but natural gas is still under a fair amount of pressure. Crude oil is poised to finish out the week above $100/barrel as the fossil fuel has been powered by strong equities and favorable news from around the world [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] 1. Three Things Wall Street Journal Didn’t Tell You About Commodities [...]
[...] One of the biggest issues commodity investors have is poor risk management with their investments. The hefty volatility that commodities display can often cause investors to exit a position prematurely, or to hold on for too long. Some may see signs of volatility and simply sell out to avoid further losses when holding on a bit longer would have led to profits. On the flip side, some investors see the volatility as a juicy opportunity and may keep faith in a position that has lost its way. Perhaps the most important thing an investors can do before making any kind of commodity trade is diligent research. Know how a commodity behaves and what factors play into its pricing. If the underlying fundamentals and technicals change, don’t be afraid to exit the position, but also make sure to not get discouraged by a few rough trading days [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Statistics show that the vast majority of commodity investors come away actually losing money, this was especially true for 2011. This year was a rough one on commodities as global instability created volatile trading, resulting in most of this asset class losing money. But of course with big losers comes a great opportunity to buy in while a fund is still cheap. Though, it may also be that you simply want to stay away from some of these bad-performing funds to protect yourself from more losses. Whatever may be the case, we outline the five worst performing commodity ETPs of 2011. Note that the list is a bit modified in that we only chose one fund from each commodity type and did not include any funds that launched this year [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] funds to protect yourself from more losses. Whatever may be the case, we outline the five worst performing commodity ETPs of 2011. Note that the list is a bit modified in that we only chose one fund from each [...]
[...] ETFs have been extremely effective for helping to spread commodities to a number of different investors. While it used to be that only futures traders were able to access this asset class, ETFs have helped the average Joe gain exposure to something like agricultural commodity producers with just one simple fund. When it comes to agriculture, there are ETPs with various investment objectives to give investors exposure to more than just plain-vanilla futures contracts [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Purchases of guns, both commercial and collectibles ones, have been steadily on the rise, even surging in recent years as fears of tightening gun-control laws have intensified. While semiautomatic weapons are quite uncommon across most portfolios, these products have steadily appreciated in value over the years, a feat that few asset classes can brag about. Just like every other commodity, the price of guns is influenced by supply, demand, as well as speculation. Many are anticipating for tighter gun-control and sales laws in the foreseeable future, while some are even preparing for the reinstatement of the federal assault weapons ban. If the 1994-2004 ban comes into effect once again, it will be illegal to manufacture weapons in the banned categories, although weapons already in circulation can continue to exchange hands. Any such restriction would likely spark a drastic increase in the value of certain guns as they essentially become commodities with fairly fixed supply levels [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] As we enter Q2, investors will be looking back to one of the best three-month stretches in recent history, as stocks surged amid a rally that has defined 2012. Both the Dow and S&P 500 have crossed pivotal points as they have hit post-recession highs and set their sights on a full recovery. But the recovery will greatly hinge on the upcoming quarter, as strong data and guidance is needed to prove that the first part of 2012 was no fluke. Investors will have their eyes fixed on the Fed and the possible announcement of QE3 as well as lagging housing data to lead the way, or drag down the recovery. For now, we outline three ETFs to watch as we kick off a quarter with another busy week on Wall Street [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] As we enter Q2, investors will be looking back to one of the best three-month stretches in recent history, as stocks surged amid a rally that has defined 2012. Both the Dow and S&P 500 have crossed pivotal points as they have hit post-recession highs and set their sights on a full recovery. But the recovery will greatly hinge on the upcoming quarter, as strong data and guidance is needed to prove that the first part of 2012 was no fluke. Investors will have their eyes fixed on the Fed and the possible announcement of QE3 as well as lagging housing data to lead the way, or drag down the recovery. For now, we outline three ETFs to watch as we kick off a quarter with another busy week on Wall Street [see also Three Things Wall Street Journal Didn't Tell You About Commodities]. [...]
[...] As we enter Q2, investors will be looking back to one of the best three-month stretches in recent history, as stocks surged amid a rally that has defined 2012. Both the Dow and SP 500 have crossed pivotal points as they have hit post-recession highs and set their sights on a full recovery. But the recovery will greatly hinge on the upcoming quarter, as strong data and guidance is needed to prove that the first part of 2012 was no fluke. Investors will have their eyes fixed on the Fed and the possible announcement of QE3 as well as lagging housing data to lead the way, or drag down the recovery. For now, we outline three ETFs to watch as we kick off a quarter with another busy week on Wall Street [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] Founded in 1989, Plum Creek is the largest private landowner in the states with its headquarters in Seattle. It is important to note that the fund is a REIT, which can turn off some investors immediately as these securities carry their own set of risks. The firm manages timberlands while producing products like plywood, fiberboard, and a number of other wood-based goods. With a market cap of $5.9 billion, PCL is one of the smallest companies on the list, though it is still relatively large by market standards [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] ETFs have been extremely effective for helping to spread commodities to a number of different investors. While it used to be that only futures traders were able to access asset class, ETFs have helped the average Joe gain exposure to something like gasoline futures in their portfolio with just one simple fund. When it comes to crude exposure, there are ETFs for nearly every segment of the market including producers, explorers, and futures [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]: [...]
[...] Most investors are aware that there are distinctions between exchange-traded funds and exchange-traded notes; ETFs hold a basket of underlying securities and may experience tracking error, while ETNs are debt securities that will expose investors to the credit risk of the issuing institution [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] returns even if Rogers is a little early on his predictions for a bull market run in agricultural commodities. With that being said, investors should keep an eye on a couple things when it comes to this firm. [...]
[...] Many investors establishing positions in commodity-focused products–whether futures contracts, ETFs, or some other type of security–do so because they believe that the spot price of that natural resource will rise. But it’s important to understand that the majority of commodity products do not offer exposure to the spot price of the underlying resource–that’s only one of the factors that ultimately contributes to bottom line returns [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] This ETF allows investors to tap into the lucrative emerging markets asset class while maintaining a focus on the mining industry. EMT holds around 25 of the largest publicly-traded mining companies involved in industrial and precious metals exploration, extraction and production within the emerging world. Top holdings by country include: South Africa, China, Brazil, and Russia. EMT also makes allocations to companies in Mexico, Indonesia, Poland, and India [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. [...]
[...] you may have already guessed, the Wall Street legend rightfully classifies gold under the nonproductive label. Because barsof gold don’t [...]
[...] they are still somewhat outside the comfort zone of most investors. Part of that may be due to the perception that commodities are riskier, but some of it may be because of the unfamiliarity with the instruments and terms that make up the [...]