How to invest in commodities?

[Spanky]

There are two mutual fund companies that offer open ended mutual funds that invest in commodities: PIMCO and Oppenheimer. There are no ETFs yet.

Another way is to invest in funds of natural resources or possibly energy.

What are some of the alternatives? What is the best way to invest in commodities?

 

[brewer12345]

Other than the funds you mentioned, you could buy commodity futures, actual commodities, or the stock of companies producing/extracting commodities. The first option is likely to be time-consuming and inefficient for a small investor. The second is likely to be a PITA/expensive (where do you safely put the actual stuff?). The third solution has some merit, particularly if you buy a natural resources company ETF, but it can be hard to tell how well the value of your holding will track actual commodities prices (for example, is a company's future production already hedged and investors will not benefit from increases in the open market price of the stuff?).

The funds seem to be the easiest, cheapest, and most efficient way to do this.

 

[ESRBob]

Plum Creek Timber is a REIT that invests in Timberland. Timberland isn't in the indexes that QRAAX or PCRIX follow.

btw, QRAAX took a huge dive last fall -- does anyone know what that was all about? Run the charts of PCRIX against QRAAX and there is a lot of divergence. I understand QRAAX has more oil exposure, but still can't figure it out, and can't seem to find any news stories that might explain it.

 

[ESRBob]

Plum Creek Timber is a REIT that invests in Timberland. Timberland isn't in the indexes that QRAAX or PCRIX follow.

btw, QRAAX took a huge dive last fall -- does anyone know what that was all about? Run the charts of PCRIX against QRAAX and there is a lot of divergence. I understand QRAAX has more oil exposure, but still can't figure it out, and can't seem to find any news stories that might explain it.

Also, PCRIX's fees are lower.

 

[brewer12345]

My understanding is that QRAAX showed a NAV drop because they paid out gains. Check fund distributions as well as NAV trends.

 

[Patrick]

There are two mutual fund companies that offer open ended mutual funds that invest in commodities: PIMCO and  Oppenheimer. There are no ETFs yet.

Another way is to invest in funds of natural resources  or possibly energy.

What are some of the alternatives? What is the best way to invest in commodities?

I think the best way is not to do it at all. I did it for about 2 years a few years ago, trading futures. I made money, but only because I quit while I was ahead. It's a zero-sum game - for you to win, someone else has to lose: really a sophisticated form of gambling. The whole thing was originally set up as a hedge for farmers so they would know that they could get a fair price for their crops at some time in the future - the investor is taking the risk and will get the gains if the prices go his way. It's the brokers who really make money, in the form of commissions. Anyway, I would say to stay away from commodities trading, unless you are using money you can afford to lose and don't mind losing it.

 

[ESRBob]

My understanding is that QRAAX showed a NAV drop because they paid out gains. Check fund distributions as well as NAV trends.

brewer, you're right -- thanks. the price moved well before the payment which confused me at first -- must have been announced then -- huge capital gains distributions of about a quarter of the fund value, half long term gains, half short-term gains. Since this fund isn't one of my normal fund family holdings I have trouble watching it, and my old standby yahoo finance has the bad habit of ignoring dividends or distributions in its charts and performance stats. Maybe its time I started using a different site for my garden variety background checks on funds. Any favorites out there?

 

[lazyday]

Morningstar quicktake chart seems to include distributions.

Yahoo, Bigcharts, and MSN don't seem to. Someone said MSN does if you download thier application, but I downloaded, and it still didn't include dividends with my settings.

If anyone finds a nice chart that includes distributions, please post.

(not that it's a good way to make investment decisions, but I admit I like to look at them as a very *minor* factor in trying to buy low and sell high).

 

[GTM]

There are two mutual fund companies that offer open ended mutual funds that invest in commodities: PIMCO and  Oppenheimer. There are no ETFs yet.

Another way is to invest in funds of natural resources  or possibly energy.

What are some of the alternatives? What is the best way to invest in commodities?

The Pimco fund is really moving over the last few weeks. I think the Jim Rogers book really created alot of interest in commodities

 

[Spanky]

GTM,

I think almost all natural resources, energy and precious metals are moving up fast.

Paul

 

[GTM]

GTM,

I think almost all natural resources, energy and precious metals are moving up fast.

Paul

Agree how do you play them Spanky?

 

[Craig]

Vanguard has an efficient precious metals fund ... VGPMX.

 

[cute fuzzy bunny]

Vanguards approach can be a good one for a more cautious investor.

Precious metals holds primarily stocks in companies that mine and process the metals, rather than the metals themselves. It can hold up to 20% of various bullions, but operates mostly as an equity fund rather than a true commodities fund.

The good news is that with this approach you allegedly get most of the upside with a lot less volatility, and a little less of the downside since even if the metal becomes valueless, the company still has intrinsic value. In the case of Precious Metals (and 'Energy'), a lot of the holdings are non-US countries, so it also doubles as a foreign stock fund.

What it probably doesnt give you as much of is inflation protection. Commodities funds that use TIPS for collateral can give you a double boost in times of high inflation. You'll get the TIPS return, plus the returns from any inflation to commodity prices. Where the commodity funds could be a huge problem is during long periods of stagnant inflation or deflation. In fact, 5-7 years of very low inflation (<2%) or a similar deflationary stretch would make you feel very displeased with your commodity investments...

 

[RD]

One of the things that you may want to check is how much you've already invested in commodities/natural resources/energy via your existing funds. I was pleased to discover that my steady eddy VWELX has 4 of the rapidly appreciated energy names in its top 10 holdings as of 1/31/05 and ~14% pf total portfolio allocated to this category. Other existing funds in my portfolio have also loaded up on energy in the past 6 months to the tune of around 10%-25% each in various funds.
As a result, I've decided not to invest funds specialized in this area since I rationalize that it would be overkilled.

OTOH, I believe enough in the trend to play it with individual stocks, keeping a tight stop limit on most names. Even with its steady progression, the energy sector and its stocks are fairly volatile on an intraday and daily basis.

 

[Nords]

I think almost all natural resources, energy and precious metals are moving up fast.

I bet they're all moving up as fast as the dollar is moving down.

Again, imagine a world where commodities (including oil) are priced in euros...

 

[GTM]

Again, imagine a world where commodities (including oil) are priced in euros...

I hope not

 

[LEX]

Re:  Commodities

I spent over 30 years working in the mining and oil and gas business.  Thats how I got to the point I have time to post here.  The commodity cycle is brutal when its down, which is where its been for the last decade, and heaven when its up.  In case any one wants to know, its up.  Way up, as China and India build up to gain industrial capacity.

Here are my own holdings in this area:

UMESX (EXCELSIOR ENERGY AND NATURAL RESOURCES)

PCRDX (PIMCO COMMODITY REAL RETURN STRATEGY FD CL D)

ICBMX (ICON MATERIALS FUND)

I avoid any pure gold or precious metal plays.  I buy base metal companies and basic material plays as they are good proxies for global gnp.

Here are two stocks I have made solid gains with during the last 24 months, which is as short a trading horizon as I use, that still have upside (IMHO) though the big gains are behind us.  

PD,

XOM

I know both compaines very well, and they are the best in terms of their management.

Do not put more than 20% of your money in this sector.  It does go down and it goes down fast once supply starts up to meet demand.  The sweet spot has been the last 24 months, as the cost of copper went from 60 cents/pound to 1.52 cents a pound and no new mines or smelters have been developed. It takes three to four years for a large mine to go from exploration to cathode or ore concentate.  Oil and gas resereves are hard to find, hard to develop, and easy to deplete.   This may be a long up cycle.  America is now competing with the rest of the world for metal and hydrocarbon feedstock.

The Jim Rogers book is very basic, but better than total ignorance on this topic. Let me give you all a basic point I learned from my dealings in commodities: The best way to buy is through funds.  I disagree with Rogers on his suggestion that one should buy options, even if one buys a hedge. Stay away from any one who tries to sell you options for the commodity in kind.  They are all going to make money at your expense with you holding the risk and paying for the ride.  Try that approach and you will be joining the ranks of the employed sooner than you would like as there is no thicker thieves den than the retail commodity brokers.  They will wipe you out before the ink is dry on your trade contract.

Good Luck!