Some commodities have performed a bit better than others in recent months.  Now that inflation fears have been put on the back burner by the Federal Reserve, will the commodities that outperformed this year resume their uptrends anytime soon, or simply hold steady for the time being? No one knows, so watch the trend lines for signals.

If the prices continue to decline from this point, have an exit strategy in place to protect yourself. We watch for positions to decline 8% off their recent high or below their 200-day moving average.

TraderMark has identified the ten hottest commodities for the year and their corresponding ETFs (although in some cases, be aware that there’s more than one way to play these commodities). Be sure to understand which commodities hold what – some hold physical commodities, some hold futures and others hold the stock of companies involved in their production.

• Unleaded Gas, represented by the United States Gasoline Fund (UGA), up 68.3% year-to-date.
• Copper, which can be accessed through the PowerShares DB Base Metals Fund (DBB), 32.3% year-to-date
• Crude Oil, represented by the PowerShares Dynamic Oil Services (PXJ), up 23.2% year-to-date
• Orange Juice, which can be exposed through the Market Vectors Agribusiness (MOO), up 24.5% year-to-date
• Silver, which is represented by the iShares Silver Trust (SLV), up 23.3% year-to-date
• Sugar, which is seen in the  iPath DJ AIG Sugar (SGG) up 32% year-to-date
• Coffee which can be accessed through the iPath DJ AIG Coffee (JO), up 6.4% year-to-date
• Soybeans, which comprises 25% of the assets of the  PowerShares DB Agriculture (DBA) is down 0.4% year-to-date; exposure to both corn and wheat, two of the nation’s largest commodities can be accessed through DBA as well
• Heating Oil, which can be exposed through the United States Heating Oil Fund (UHN), up 22.2% year-to-date
• Nickel, which is represented through the iPath DJ AIG Nikel (JJN) up 31.5% year-to-date.

For more stories on commodities, visit our commodities category.

Kevin Grewal contributed to this article.

Be sure to note the differences between ETFs and ETNs.

The cocoa ETN iPath DJ AIG Cocoa TR Sub-Idx ETN (NIB), currently down 13.6% year-to-date, tries to track the returns available through unleveraged investment in the futures contracts on the commodity from the index along with the rate of interest that could be earned on cash collateral invested in certain Treasury Bills. Cocoa demand has been down, with futures recently losing 3.9% as early speculative buying disappeared, reports Tom Sellen for The Wall Street Journal. Cocoa now goes for $2,353 a metric ton.

The cotton ETN iPath DJ AIG Cotton TR Sub-Idx ETN (BAL), currently up 15% year-to-date, seeks to reflect returns available through unleveraged investment in the futures contracts on the physical commodity from the index as well as the rate of interest that is potentially earned on cash collateral invested in certain Treasury Bills. According to Forrest Laws at the Farm Press, the cotton market is “biding its time” and futures are steadily climbing and could hit the high 60-cent range by December. Growers are worried about excessive rain in the Cotton Belt, which has delayed planting.

The coffee ETN iPath DJ AIG Coffee TR Sub-Idx ETN (JO), currently up 15% year-to-date, tries to mirror the returns available through unleveraged investment in the futures contracts on the commodity from the index along with the rate of interest that may be earned on collateral invested in specific Treasury Bills. Coffee prices could face a price spike and demand is on the rise, the Press Association says. Bad weather has led to a shortage of Colombian Arabica.

The carbon market ETN AirShares EU Carbon Allowances (ASO), currently down 4.4% year-to-date, intends to reflect the performance of a basket of exchange-traded futures contracts for European Union Allowances, which is an entitlement to produce 1 metric tonne of carbon dioxide that is transferable in accordance to the European Union Greenhouse Gas Emissions Trading Scheme.

On Wednesday, Republicans in the U.S. House of Representatives pushed to include nuclear power and “clean coal” as alternative energy resources used for electricity, reports Richard Cowan for The Washington Post. Democrats are gunning for renewable sources in wind and solar power.

Provisions still being negotiated include: Permits that may be given to oil refiners. A $17 billion fund for R&D of alternative fuels. Better trade protection for U.S. companies that would have to compete against foreign firms not compliant to carbon-emission rules. Cap and trade bill that may cause higher energy prices.

The PowerShares WilderHill Clean Energy (PBW), currently up 4% year-to-date, seeks to track the WilderHiill Clean Energy Index, which delivers capital appreciation through selection of companies focused on green and renewable energy sources and clen energy technologies.

The energy and climate bill circulating in the House of Representatives may include a scaled-back renewable power target of 15% by 2020, writes Ben Geman for The New York Times. This will require utilities to supply power from wind, solar and biomass sources.

The draft limits sources for biomass harvesting. Municipal solid waste will be counted among sources of renewable energy. Energy efficiency resource standard (EERS) are no longer included.

Max Chen contributed to this article.

Then we’ll start looking forward to what we hope will be a year full of less pain and more investment opportunities.

1) Global markets will no longer be in sync with the U.S. market, and ETFs are the way to take advantage of global growth.

While domestic markets weren’t as bad as global ones, let’s face it: no one was safe in this downturn. Most global markets were hit harder than the United States was. As of Dec. 9, the S&P 500 was down 39.5%. European markets were down about 47.9%; Asia was down about 46.9% and Latin America was off by 50.8%.

The events of this year show that we’re all linked and interdependent. As the United States slowed down and stopped spending, it created a ripple effect that touched every market in the world – imports slowed, exports dropped off and everyone felt the pain.

2) Actively managed ETFs fail to generate excitement.

Yes. The first actively managed ETF launched in March, but the fund couldn’t have had a worse name attached to it: Bear Stearns. By September, the fund announced it was closing down.

But for other actively managed ETFs that were launched by PowerShares this year, the jury is still out. These funds are in a challenging climate, and while they’re beating or are even with the broader market, most of them are down, so the assets aren’t pouring in at the moment:

• PowerShares Active Low Duration Fund (PLK): Invests in a portfolio of U.S. government, corporate and agency debt securities. It seeks to outperform the Lehman Brothers 1-3 Year U.S. Treasury Index. The unitary fee will be 0.29%. In the last three months, it’s up 2.8% and has $6 million in assets.
• PowerShares Active Mega Cap Fund (PMA): Invests primarily in the equity securities of mega-caps. It seeks to outperform the Russell Top 200 Index. The unitary fee will be 0.75%. In the last three months, it’s down 21.5% and has $2 million in assets.
• PowerShares Active AlphaQ Fund (PQY): Invests in a portfolio of about 50 securities listed on the Nasdaq Global Market. It seeks to outperform the Nasdaq 100 Index, and the unitary fee will be 0.75%. PQY is down 31% year-to-date and has $4 million in assets.
• PowerShares Active Alpha Multi-Cap Fund (PQZ): Invests in about 50 securities selected according to a methodology developed by AER advisors. It seeks to outperform the S&P 500. Its unitary fee will be 0.75%. It’s down 39% year-to-date and has $6 million in assets.

The PowerShares Active US Real Estate Fund (PSR) launched in November. Look for even more launches in the active space in 2009.

3) ETFs hit $1 trillion in assets.

Nope, not even close. ETFs enjoyed positive asset flow this year, but 2008 is not the year the industry is going to hit the $1 trillion mark. As of November 2008, total assets for U.S.-listed ETFs and exchange traded notes (ETNs) stood at $487.6 billion, a 16.8% decline from November 2007. But ETFs are still experiencing strong inflows: $26.4 billion for November and more than $70 billion year-to-date. Mutual funds have  had more than $400 billion in outflows year-to-date coupled with more than $1 trillion of market depreciation.

ETFs also represent 43% of all equities trading volume in the United States. Launches continued this year as well: there were a total of 843 ETFs and ETNs in existence as of November’s end, compared with 650 a year ago.

4) More ETFs will appear on global exchanges.

True. ETFs managed to continue a popularity surge that left few areas of the world untouched. Some established participants in the ETF marketplace continued to see new offerings, including Europe. In August, the London Stock Exchange saw its biggest launch of new ETFs ever with 19 new funds. Barclays expanded into new markets, such as Brazil, with the launch of three new funds there earlier this month. The Middle East was also a hot spot for new ETFs, with Dubai and Abu Dhabi launching ETFs and other exchange traded products of their own. Ireland also got an index, and it’s soon to be followed by an ETF.

5) Bigger players will enter the market.

True. Most notably, PIMCO, the world’s largest bond fund manager, is gearing up to launch a line of bond ETFs. PIMCO filed for a proposed 1-3 Year Treasury Index Fund, which will trade on the NYSE Arca exchange and follow a Merrill Lynch benchmark. If PIMCO’s example sticks, we could see even more mutual fund providers getting into the ETF space.

6) Commodity ETFs will continue their expansion and gain even more popularity.

True. Let 2008 go down in history as one of the bigger years for commodities. Not only did prices shoot up to historic highs in July, but most of them lost big in the second half of the year. Some, such as oil and gas, lost 70% from their records. New commodity ETFs and ETNs were launched at a blistering pace nearly all year, and they covered strategies and commodities of all types: long, short, leveraged, gold, platinum and other precious metals, coffee, sugar, cotton, livestock, oil and gasoline.

7) Fixed-income assets will grow.

Definitely, but most of that money went to Treasuries. As we write, we’re in the midst of a rush to Treasuries that has driven yields down to lows not seen in 50 years. In fact, government debt is so popular right now that an auction of $30 billion in short-term securities at a 0% yield created so much demand, the government could have sold four times as much. This year has been all about investors looking for security. As of November 2008, there were 52 fixed-income ETFs available, compared with 49 at the start of the year.

8 ) U.S. investors will begin realizing that they can look abroad for their investments.

Not so much. Not that looking abroad was necessarily a bad thing, but this year, investors saw that there were few places for them to go outside of the standard safe havens. Every sector and global region has been hit in this crisis – even traditionally defensive sectors were left reeling.

9) Individual investors will start asking their financial advisors why ETFs aren’t part of their portfolios.

True. Investors are fed up, and it’s showing. We’re seeing a louder call for ETFs in 401(k) plans, as well as a push for better fee disclosure. While the industry is not quite there yet, it’s better off than it was a year ago.

Perhaps one bright spot in this financial crisis is how aware it has made individual investors about their portfolios, and we think that the days of convoluted and high fees and a lack of transparency are over. People are paying attention now. Investors are not only realizing that ETFs are the perfect product to remedy these issues, but they’re going to start demanding them more than ever when the market begins to turn around.

10) An ETF of ETFs will finally hit the U.S. market.

Yes. PowerShares led the way in May of this year, with a line of ETFs of ETFs.

• PowerShares Autonomic Growth NFA Global Asset Portfolio (PTO): The most growth-oriented of the three funds, with 90% equity and 10% fixed income. $9 million assets.
• PowerShares Autonomic Balanced Growth NFA Global Asset Portfolio (PAO): Holds 75% equity and 25% fixed income. $8 million assets.
• PowerShares Autonomic Balanced NFA Global Asset Portfolio (PCA): Holds 60% equity and 40% fixed income. $7 million assets.

World coffee consumption is expected to exceed production from 2009-10, because of smaller crops in Brazil, by as much as 8 million bags, reports Claire Leow for Bloomberg.

Prices of the mild-tasting arabica coffee used by Starbucks Corp. jumped 6.1% yesterday, the biggest gain in almost three years. This is a tight situation that will support prices in the long run.

Prices of the bitter-tasting robusta used in espresso and instant coffee by Nestle SA climbed 4.3%, and output is rumored to drop 22% next year, or 36 million bags.

• iPath Dow Jones AIG Coffee TR Sub-Index ETN (JO) down 24.8% since inception

Nigeria is the world’s fourth-largest producer of the key chocolate ingredient, reports Dulue Mbachu for Bloomberg. The stepped-up production was as a result of government incentives. Production could have actually been higher, since the official tally doesn’t account for cocoa smuggled out of the country.

The top three cocoa producers are Ivory Coast, Ghana and Indonesia, according to the International Cocoa Organization. Cocoa prices have been on an overall uptrend in the last year, up 37% in July from a year ago. Prices are now at their highest levels in two months.

Sugar, in particular, is benefiting from a renewed interest in soft commodities. After Tuesday’s gain, sugar continued the upswing and went to a 21-month high, reports Nigel Hunt for Reuters. Arabica futures are turning higher, too, leading to a run-up in coffee prices.

Is anybody else hungry?

• iPath DJ AIG Coffee TR Sub-Index ETN (JO), up 1.5% since July 8 inception
• iPath DJ AIG Cocoa TR Sub-Index (NIB), down 4.5% since July 8 inception
• PowerShares DB Agriculture (DBA), up 11.3% year-to-date (holds 19.1% in sugar futures)
• UBS E-TRACS CMCI Food (FUD), up 5.6% since April 4 inception (holds sugar, coffee and cocoa)

Wait, what? Yes, we said India. Among the coffee-producing countries in Asia, India is the third-largest.

A drought last month threatened to lower coffee yields, but rains have rejuvenated hopes, reports Thomas Kutty Abraham for Bloomberg. Rain in the last month is said to be so good that it’s nearly wiped out the deficit. The country’s coffee exports rose 6.4% in the first seven months of the year as producers shipped more to nations such as Russia and Italy.

The stepped up production may have an impact on the iPath DJ AIG Coffee Total Return Sub-Index ETN (JO), which launched on June 24. It’s down 4% since then, but is trading higher today.

Meanwhile, the Sensex Index rose to its highest point in six weeks, led by banks, reports Pooja Thakur for Bloomberg. In particular, ICICI Bank, the country’s second-largest lender by assets, rose the most since July 23.

Sectors sensitive to interest rates, including banks, autos and real estate, are up on hopes that oil prices will continue to fall, says one analyst.

Two India-related ETFs launched this year, and they could benefit on the index’s strength:

• WisdomTree India Earnings (EPI): down 22.9% since Feb. 26 inception; 7% financials; ICICI is 3.2%
• PowerShares India (PIN): down 16.5% since March 5 inception; 10.9% financials; ICICI is 1.4%

Kraft Foods (KFT) reported its second-quarter earnings, which rose 4%, reports Emily Fredrix for the Associated Press. Could higher food prices being sending consumers back to their old college day low-cost standbys?

Kraft doesn’t just make the famous macaroni and cheese in the blue box, but also Velveeta, Oreo cookies and Maxwell House coffee. Their earnings reports beat analyst expectations, thanks in large part to the company’s swift action when it came to rising prices. Many of their competitors lagged behind them when it came to charging a bit more to offset rising costs.

The Vanguard Consumer Staples (VDC) is up slightly in trading today, and it’s down 5.9% year-to-date. Kraft is 3.6% of the fund. It’s also 3.9% of the Consumer Staples Select Sector SPDR (XLP), which is down 5.6% year-to-date.

Verizon (VZ) also reported higher profits today, because of wireless sales that were strong enough to offset any losses among landline users. Executives went on to say that they didn’t expect a significant impact from the weakening economy, reports Ritsuko Ando for Reuters. Second-quarter revenue rose 3.7%, in line with expectations.

There are still nerves about a labor dispute, as the union’s labor contact is set to expire on Aug. 2. Verizon’s shares are trading lower today, and it’s weighing down a few ETFs that count it as a top component:

• iShares Dow Jones US Telecom (IYZ): down 20.5% year-to-date; Verizon is 15.4%
• Telecom HOLDRs (TTH): down 23.6% year-to-date; Verizon is 24.3%

By focusing more capital and attention toward the newer consumer, China, the effect upon Starbucks will be positive, with more innovation, new products and more resources. Stephanie Wong for Bloomberg reports that U.S. consumers have cut back on luxury goods such as gourmet coffee, forcing Starbucks biggest job cuts and closures in history; 600 U.S. outlets and 12,000 jobs ends their four-year period of expansion.

ETFs/ETNs that could take another shot of espresso:

• iPath Dow Jones AIG Coffee Total Return Sub-Index (JO)
• S&P China SPDR (GXC)
• iShares FTSE/Xinhua China 25 Index (FXI)
  

Yum Brands (YUM), head of Pizza Hut, Taco Bell, and KFC chains had a second quarter profit rise on higher sales in China. It appears the emerging middle class in China has not only grown, they have fallen victim to coffee addiction and junk food consumption, similar to the mainstream Americans.

Net income rose to $244 million, or 45 cents per share, from 07’s 39 cents, reports Joseph Galante for Bloomberg. PowerShares Dynamic Food And Beverage (PBJ) holds YUM at 5.42% of assets.

As anyone who’s been to a cafe recently can attest, coffee isn’t cheap and it’s poised to get even pricier. In Brazil, the cost of fertilizer and farm labor is putting the squeeze on profits, reports Peter Murphy for Reuters. The price for fertilizer has nearly doubled in less than a year, but the biggest blow has been the appreciation of the Brazilian real, which cuts into growers’ incomes.

Arabica futures are up 25% from a year ago, and Brazil is the top coffee-producing country in the world. Colombia is second.

Last month, Barclays rolled out a few ETNs intended to track the direction of several markets, including coffee. This has been part of the new breed of financial instruments designed for individual investors to bet on specific commodities, reports J. Alex Tarquinio for The New York Times.

This trend seems inevitable, given the sharp upward direction that food prices have gone. However, financial advisors warn that speculating on individual commodities can be a dangerous game, especially after the money has been made. As food has taken on the role of major commodities such as oil and grain, insiders reckon that commodity prices are way more volatile than shares of commodity producers. Many criticize the single-commodity ETN as more of a distraction than diversification tool.

Commodities have been in a bull for awhile now. Whether it will remain so and for how long is anyone’s guess. Just be aware of the risks of commodities and look for those funds trading above their 200-day moving averages.

Coffee exposure can be had in both:

• UBS E-TRACS CMCI Food (FUD), launched April 4
• iPath Dow Jones-AIG Coffee Total Return Sub-Index (JO), launched July 8

They plunged by the most since March, as grain futures fell, while rain from Colorado to Pennsylvania brought fresh hopes for crops, reports Millie Munshi for Bloomberg. Corn, wheat, soybeans and cotton all fell by the maximum amount allowed by U.S. exchanges.

Those numbers follow a record month for June, in which corn rose 26% and soybeans rose 15%. Copper, cocoa, gold, silver and coffee also fell as worries about supply tapered off

What does it mean? Is this a bump in the road, or the start of a downtrend? We’ll have to wait and see on that one, but always be sure to have your exit strategy handy, no matter what happens.

• PowerShares DB Agriculture (DBA), up 21.3% year-to-date
• iShares COMEX Gold Trust (IAU), up 10.8% year-to-date
• iPath Dow Jones-AIG Cocoa Total Return Sub-Index (NIB), launched June 24
• UBS E-TRACS CMCI Food (FUD), launched April 4

For full disclosure, some of Tom Lydon’s clients own shares of DBA.