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Commodities Garner Respect

Outsourcing America

Commodities Garner Respect

By Ronald L. DeLegge, Editor

May 1, 2007

 

SAN DIEGO (ETFguide.com) - If soaring commodity prices hasn't caught your attention, then maybe the number of exchange-traded products tracking them will.

 

Through the first quarter, there were 17 such products tracking both broad sector and single commodity indexes.

 

One such example is an exchange-traded note (ETN), known as the iPath Dow Jones AIG Commodity Index (NYSE: DJP) which was launched in mid-2006. As a commodity basket, this index note tracks the price of 19 different commodities. Included in this group are all of the usual suspects, including crude oil, unleaded gas, copper, gold, and silver.

 

At the end of 2006, the Dow AIG Commodity Index experienced five-year annualized returns of 16.10 percent. Over the same period of time, it handedly outperformed key stock indexes like the Dow Jones Industrials, Nasdaq-100, and S&P 500. Even bonds, as measured by the broad Lehman Aggregate Bond Index, badly underperformed commodities. Who says stocks and bonds give you all the diversification you'll ever need?

 

Perhaps, the biggest selling point of commodities is their negative historical correlation to stocks and bonds. On any given day, if commodities are zagging, everything else is zigging and vice versa. For portfolios with exposure to all of the above, this renders the valuable service of reducing volatility by increasing diversification. Toss in the fact that commodities have long been considered an excellent hedge against inflation and their usefulness becomes even further cemented.

 

For sure, diversification isn't what it used to be. Slowly, investors are coming to the realization that true diversification can't be achieved through stocks, bonds, and real estate alone.

 

If stellar performance still isn't enough to earn commodities their rightful place, then maybe the wave of commodity linked exchange-traded trusts will help them along.  Without a doubt, these products have made it more convenient for investors to gain affordable and convenient market exposure to commodities. Long gone are the complicated days of buying futures or having to take physical delivery of corn husks.  

 

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