Commodities ETFs

**Scanner** · 03-28-2007, 01:13 PM

JimOhio,

Good questions and although I am not as a diligent researcher as you, I did do a little homework on this.

) If oil were $80/barrel and increased to $100/barrel (25% gain), would a commodity ETF invested in oil also increase 25%?

Yeah, that's how they are supposed to work and yes, you can be confident that most of the time they do. However, oil is a complex commodity because it has a shelf life, like grain. So, what the fund managers do, to try to match it is buy a certain number of "oil futures" for their "basket." And that has a cost associated with it - turning over oil futures every 3 months. So, sometimes there is a little "disconnect" from the price, not huge, but some disconnect.

That is, it won't track it 100%.

Some oil ETF's (I think USO) were getting criticized for this because there wasn't a 100% correlation to the price of oil and some are calling for a better way to get exposure to "this mother of all commodities."

Also realize some ETF's track sweet crude, but others, such as DBO actually track a mix of oil, natural gas, sweet crude, high sulfur crude, etc. The quotes you see on a daily basis are usually sweet (I think called Texas Intermediate) crude. So those ETF's are more diversified.

It is something to consider, the disconnect, but I figured the "disconnect" was kind of the price of doing business, kinda like a management fee. But you'll see if you buy - oil is up one day, down the next, and your ETF should match it.

Remember too. . .like a stock, there's market risk. In the case of my silver, it came to my attention that many fund managers bought gold and some silver as a hedge in their fund. So when the market tanked last month, to protect their investors, they sold their gold.

Now. . .nothing fundamentally changed too much with gold or silver that correction day - the fund managers just had a bug up their derriere and decided to sell off.

This is the world of ETF's probably more so than mutual funds. They are easily liquified.

Silver is a little different because it doesn't expire on the shelf - I own SLV, which actually locks the silver in a vault and then sells a tiny bit of it to cover fund expenses (so there is always a diminishing stock). There was another silver ETF, I can't recall the ticker symbol, that bought futures and there was no decreasing supply.

But I felt the company actually owning the silver (Goldman Sachs) was a better way to go for me.

2) how would someone search for available ETFs (whether commodities or equities)?

Directly from the ETF company itself - they will send you a prospectus and you actually buy the ETF from a brokerage like a stock.

3) I have custodial account for my goddaughter (at sharebuilder) and am thinking of purchasing about $300 worth of an ETF for her... it will be held for 14+ years (she is 3 right now). Buy and hold and hold... any thoughts on an ETF which invests in oil or something else which has a general upward trend?

You know. . .I am starting to conclude, and I could flip-flop on this, that oil is a commodity that is best traded, because I do think that we are able to substitute it, at least somewhat. The International Energy Agency, who advises countries and govt's, sees oil for the next 20 years fundamentally being at $50-60 barrel, not factoring inflation (so it will go up). That being said, they also acknowledge that global tensions, war, natural disaster can artifically inflate it.

So, right now, it's running $64/barrel. . .that's on the high side fundamentally (and US supplies are rising).

I don't normally beleive in timing but I don't think oil is not a buy until it drops under $55/barrel. This isn't to factor in we are someday going to switch to hydrogen as an intermediary. . .not next year, maybe not next, but hydrogen is highly explosive and although expensive to manufacture at this time, it is basically produced like the high school chemistry experiment you did with 2 electrodes.

We'll always use oil to some extent, for fertilizer, for plastics, but someday we'll reach a point where we are not an oil-based economy, or at least that's a possibility to consider when making a long term play.

Silver, on the other hand, isn't really going to be replaced on the Periodic table of elements, unless alchemy makes a comeback. And there is a "preciousness" about it, not equal to gold though. That's why I did make a long term play.

I am not too familiar with non-commodity ETF's but I have this on my "watch" list at yahoo - ICF ticker symbol. It's an ETF that tracks REITS. It's been jumpy lately as you can imagine. I am watching it because I think real estate needs to unwind a bit.

If you aren't married to the idea of a commodity ETF, this may be something to consider. Long term, I'd imagine this should net a 7-10% return for your god-daughter.

**sweeps** · 03-28-2007, 01:27 PM

Sorry if I'm thread-crapping, but I just don't see the obsession with investing in commodities. They do really well every 30 years or so, everyone piles in and then the bottom falls out and they flatline for another 30 years.

**Scanner** · 03-28-2007, 01:41 PM

Sorry. . .I re-read what I wrote and I may have sounded a bit too bearish on oil so I thought I would add in a "post-script."

To me, if you buy an oil ETF when oil is running around $55/barrel, even hold out for $50.00, you'll get a return better than inflation because you are getting in on the low side fundamentally. That is, I think you would be doing your granddaughter a good thing.

Because you'll get at least 4% with inflation and I do think a bit more.

Whether it will outperform the market in the long run. . .hard to say. . .that's why I diversify with it, but don't necessarily beleive everybody should run out and buy a commodity, especially for a singular holding.

There is risk with anything and I know you know that but I thought I would just state the obvious.

**Scanner** · 03-28-2007, 01:46 PM

Sweeps,

Part of the reason you see with the "commodity rush" is an actual fundamental, not just a bunch of frenzied knuckleheads trying to get rich quick.

We as a world are getting bigger and our consumption appetite is growing. When humans go forth and multiply, they need oil, water, grain, copper, platitinum, etc. to exist.

To ignore that, IMO, is analogous to ignoring 10-15 years ago, the forecasted rising presence of the international economy. Well, here we are - 15 years later and you have China, India, Europe. Remember. . .the pundits said 15 years ago, "Oh, 10% max. in International."

Well, the people who did that were "underexposed" IMO. Too late now, isn't it?

So. . .I am being a bit contrarian to the pundits when they say, "Oh, max. 10% in commodities." I think that's a little underexposed.

I'll admit a broad commodity index may be smarter though and maybe more appropriate for his goddaughter.

**JBinKC** · 03-28-2007, 03:42 PM

GLD trades at 1/10th of an ounce of a current price of gold. SLV trades at 10 ounces of the current price of silver. USO is based on futures prices of a basket of oil commodities like crude,unleaded gasoline and heating oil. No set percentages of each and forward months are given so I would answer no to your question.

There are also currency ETFs FXA FXB FXC FXE FXF FXM FXS FXY

**msnln** · 03-29-2007, 01:14 PM

I personally would not invest in commodities now due to cyclical nature of the sector. Commodity bug bit me last year and I owned ethanol producers, uranium producers, solar panel producers, commodities miners, etc but liquidated earlier this year. I made money with uranium, solar and miners but lost with ethanol but I just felt that they were becoming too vogue and those sectors just seemed to go up too much (and are still going up).

Anyway, I replaced those and bought leveraged index etfs. I sleep a lot better knowing my portfolio is comprised mostly of S&P 500 and NASDAQ 100 stocks, albeit they are 2X leveraged. When investing for long haul, you cannot do much better than indexing as sector rotation takes too much work and thrill. All my investments are for retirement so I won't touch them for 20+ years.

(By thrill I mean it takes months to get decent profits on a position but it takes mere few days to wipe out bulk of those profits when sector rotation occurs and you are rushing to liquidate your position to salvage few % points that remains.)

I bought Proshares Ultra ETFs that cover S&P 500 and NASDAQ 100 but they have other ultrashares listed on their site. They also have other exotic etfs like inverse index that can be used to hedge your long positions.

ProShares ETFs - Exchange Traded Funds from ProFunds Group

**jIM_Ohio** · 03-30-2007, 04:56 AM

Originally posted by Scanner View Post

Sweeps,

I'll admit a broad commodity index may be smarter though and maybe more appropriate for his goddaughter.

what tickers, and I assume these are ETFs?

**Scanner** · 03-30-2007, 05:46 AM

DJP: Profile for IPATH DJ AIGCITR ETN - Yahoo! Finance

See if that link works.

**jIM_Ohio** · 03-30-2007, 05:58 AM

anything with a 1-3 year history you could suggest?

Commodities ETFs