At the end of September, U.S.-listed ETNs held $6.9 billion in assets, compared with the $697 billion held in ETFs, writes Matt Hougan for IndexUniverse. (What are ETNs?)

There are three key advantages they enjoy:

• When ETNs first came to the market, the investment vehicle proved to be popular among investors who were looking for access to difficult-to-target markets, such as commodities and certain foreign markets. Investors flocked to funds such as the iPath MSCI India (NYSEArca: INP) and iPath Dow Jones-UBS Commodity Index ETN (NYSEArca: DJP). There are ETFs that target these areas now, but ETNs still cover certain areas not yet covered by ETFs.

• ETNs promise perfect tracking – an investor receives the full return of the benchmark, minus costs. Commodity ETFs on the other hand do show some tracking errors. Any tracking error in an ETN is borne by the issuer; tracking error in ETFs are borne by the investor.

• ETNs also have the benefit of being treated like a zero-dividend stock for tax purposes. This means that you don’t pay taxes until you sell, and holding a commodity ETN longer than a year only costs an investor 15% long-term capital gains taxes when sold. Futures-based commodity ETFs are treated like futures, which means gains are marked-to-market each year and investors pay taxes on gains at 60%/40% long-term/short-term capital gains tax rate. Be sure to consult your tax professional for advice. (Are you ready for the taxman?)

A deterrent for ETNs investing is that they are unsecured debt notes. The ETN’s value depends on the credit of an issuing bank – if the bank bankrupts, you’re out of luck. Most ETNs, however, offer daily redemptions at net asset value. Potential ETN investors should note that the CFTC’s plans for regulation in the commodities market could force some ETNs to close down, but this remains to be seen. (Differences between ETNs and ETFs)

For more information on ETNs, visit our ETNs category.

Some of the more heavily traded ETNs include:

• iPath DJ AIG Lead TR Sub-Idx ETN (NYSEArca: LD): up 128.9% year-to-date
• iPath DJ AIG Sugar TR Sub-Idx ETN (NYSEArca: SGG): up 57.7% year-to-date
• iPath Dow Jones-AIG Commodity Idx TR ETN (NYSEArca: DJP): up 16.2% year-to-date
• iPath MSCI India Index ETN (NYSEArca: INP): up 82.4% year-to-date
• iPath S&P GSCI Crude Oil Ttl Ret Idx ETN (NYSEArca: OIL): up 16.1% year-to-date

Max Chen contributed to this article.

The price of commodities surged from March to June, but growth has slowed since then, remarks Harvey Jones for The Motley Fool. For the long-term, investment guru Jim Rogers thinks the current commodities bull market will run till 2022. (More on Jim Rogers).

The spike in commodities prices was attributed to Chinese demand for raw materials and financial speculators looking to offset potential falls in the dollar and inflation. (How to play a weak dollar). The rally was not driven by a global recovery in trade and economic activity. Eventually, countries and especially emerging markets will be demanding commodities to feed and drive their economies.

There is a possibility of deflation, which could quickly reduce commodity prices.

Individual commodities have many different factors that affect the their prices. Commodities have varying economic cycles, most are non-correlated to equities and some commodities prices change with the weather. One of the basic factors is that of supply and demand.

Rather than trying to guess which commodity will outperform, you may want to consider a broad-based ETF that gives exposure to the total asset class. Also be sure to have a strategy; you can read about the one we use here.

For more information on commodities, visit our commodity category.

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG): up 14.2% for the year; Almost half of the index reflects crude oil, and the balance is split between other energy products such as natural gas as well as agricultural commodities, industrial and precious metals and livestock.

• iPath Dow Jones-AIG Commodity Index Fund ETN (NYSEArca: DJP): up 17.1% for the year; has holdings in oil, copper, natural gas, gold, aluminum, zinc, sugar and more.

• PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC): up 13.7% for the year; has weightings in heating oil, natural gas, oil, silver, corn, wheat and soybeans.

Max Chen contributed to this article.

One of the more common misunderstandings of investing in the commodity world is what commodity funds actually hold, explains Gary Gordon of ETF Expert.

While ETFs and ETNs have made the investment process easier, it helps to know exactly what you’re investing in to avoid surprises. It also helps to explore all of your options, as well, because in some cases, a fund that invests in commodity producers may be performing better than the commodity itself.

Take Market Vectors Gold Miners (GDX) as an example. Year-to-date, it’s up 9.8%, while SPDR Gold Shares (GLD) is up 5.9%.

The types of commodity funds available include:

• ETFs that invest in companies. Examples of this are the aforementioned GDX. It also includes Market Vectors Steel (SLX), iShares S&P Global Energy (IXC) and Claymore S&P Global Water (CGW). In these funds, you’re investing in companies that are in some way involved in the production of these commodities, rather than futures or the commodities themselves.
• ETFs that hold futures. These include United States Oil (USO), PowerShares DB Gold (DGL) and iShares S&P GSCI Commodity-Indexed Trust (GSG). An advantage to owning these types of funds is the fact that rolling over futures contracts is handled for you.
• ETFs that hold the physical commodity. This includes iShares Silver Trust (SLV) and iShares COMEX Gold Trust (IAU). These ETFs eliminate the hassle and expense of owning and storing a physical commodity.
• Commodity ETNs. Commodity ETNs are the same as other ETNs in that they’re debt obligations backed by the full faith and credit of the issuer. Types of these include iPath Dow Jones-AIG Commodity Index (DJP) and E-TRACS UBS Boomberg CMCI Food ETN (FUD). Look at the underlying index to see how it’s constructed – for example, FUD’s index is a basket of agriculture and livestock futures.

This is by no means a complete listing of all these types of funds. When you’re looking into commodity ETFs, check to see what it holds so you know what you’re getting, how it stacks up performance-wise against other ETFs targeting the same commodity and follow the trend lines using an entry and exit strategy.

For the rundown on the differences between most of the commodity funds, check out this commodity report we ran last month.

For more stories on commodities, visit out our commodity category.

Diversification is one way to reduce risk while optimizing overall returns, and finding non-correlating assets is key to diversification, remarks Gary Gordon for ETF Expert. By reducing risk, an investor should consider a mix of low-correlating assets and some developed market funds.

Most developed markets indexes move in unison with another. Some examples include:

• S&P 500 SPDR Trust (SPY): up 5.9% year-to-date
• iShares S&P Small Cap 600 (IJT): up 7.8% year-to-date
• iShares Global 100 (IOO): up 4.6% year-to-date
• Japan’s iShares MSCI Tokusai Index (TOK): up 9.9% year-to-date

Foreign fixed income, natural resource, commodity, energy, emerging market, currency, and precious metal stocks all had smaller correlations to broad market developed stock funds. Related ETFs include:

• SPDR Lehman International Treasury Bond ETF (BWX): up 1% year-to-date
• iShares Natural Resources Fund (IGE): up 23.9% year-to-date
• iShares Dow Jones-AIG Commodity Index ETN (DJP): up 11% year-to-date
• Alerian MLP ETN (BSR): up 26.2% year-to-date
• iShares Emerging Market Fund (EEM): up 36.7% year-to-date
• Powershares Precious Metals (DBP): up 16.1% year-to-date

Finding non-correlating assets is just one piece of the overall puzzle.When looking into the broad market or specific sectors, a savvy investor should have a strategy in place. Take a look at our investing strategy to get a sense of things.

Max Chen contributed to this article.

We wrote a report back then, which thoroughly covered the commodities area, from the broad-based funds to the single commodities. From that report, many commodities went on to hit record highs.

How things have changed. Oil, gold, gas and more all have corrected sharply. It’s a matter of great debate now what’s going to happen next. One thing that’s for certain is that the tanking of most commodities illustrates the importance of having an exit strategy. Our own is to exit when a fund is 8% off the recent high or below its 200-day moving average – and most commodities are off their highs by double digits.

Right now, there’s a looming threat of inflation. The government is printing new money by the truckload, which could lead to an inflationary situation down the road. Commodities are often high first, which is why they’re still worth keeping an eye on despite the correction.

Some, like Jim Rogers, say not to count out commodities, now or ever. That’s because the credit crisis is creating an inability for farmers to get loans, which means they can’t grow. This will lead to supply shortages, after which high prices ultimately will follow. Food demand is expected to increase, as populations in emerging markets boom and many of those areas adopt a more western diet. Staple commodities, such as corn, soybeans, wheat and sugar could very well continue to see historic levels of demand. And the assets flowing into such ETFs don’t seem to have slowed much, either.

This fascinating chart from U.S. Global Investors shows how commodities over time might have price swings, but eventually revert to their long-term averages, also known as “mean reversion.” Not one category in this chart has shown any consistency in the nine-year period it tracks. By allocating your assets and remaining diversified, investors can gain some volatility protection.

Oil has been holding steady for a few weeks, around the $40 a barrel mark. There’s a big fight going on now: declining consumer demand that remains far below production, and OPEC can’t seem to cut production enough at this point.

Gas prices are moving up, however. In the last month, the cost of a gallon of gas in Orange County has risen 27 cents. The disconnect between the two can be blamed on refineries, which are operating at their lowest capacity since 1992.

The outlook for gold is mixed. While there’s agreement that prices will probably stay put for now, the question is how high will they go? Some call for $1,500 an ounce, others are expecting as high as $2,000 an ounce.

No one can say for certain where commodities are headed, which is why we so firmly adhere to the trend-following strategy instead of relying on predictions that are often at odds with one another. Many hours have been spent by experts, trying to call which way commodities will go and when. For now, we’re going to wait for the trend to appear. At the moment, it’s simply not there.

• PowerShares DB Agriculture (DBA) is an ETF that contracts on some of the most liquid and widely traded agricultural commodities — corn, wheat, soybeans and sugar. DBA hit a high on Feb. 26, 2008, and has fallen 41.3% since then.

• Market Vectors Global Agribusiness (MOO) tracks the stock-based DAXglobal Agribusiness Index and provides exposure to 40 worldwide companies in five segments: agricultural chemicals, agriproduct operations, agricultural equipment, livestock operations and ethanol/biodiesel production. The top five components, by market weight, include: Mosaic Co. (MOS), Potash Corp. (POT), Monsanto Corp. (MON), Deere & Co. (DE) and Archer-Daniels-Midland (ADM). MOO’s high was on June 17, 2008; it has since declined 54.3%.

MOO made a distribution on Dec. 26 that is not reflected in the chart above.

• ELEMENTS Rogers International Commodity Agriculture ETN (RJA) seeks to replicate an index that represents the value of 20 agricultural commodity futures contracts. RJA’s high was hit on Feb. 26, 2008, and the ETN has declined 44.2% since then.

• For a more diversified energy play, the PowerShares DB Energy Fund (DBE) replicates an index tracking the prices of two different grades of crude oil, heating oil, gasoline and natural gas. The high was reached on July 3, 2008; since then, DBE has lost 64.9%.

• United States Gasoline (UGA) tries to match the percentage increase in the unleaded gasoline futures that trade on the New York Mercantile Exchange. In concept, this fund increases in value by the same amount that gas rises in price at the pump. UGA reached a high on July 2, 2008, but has fallen 64.9% since then.

• iShares Dow Jones U.S. Energy Sector Index Fund (IYE) is as pure a play on energy as you can get with 10 top holdings including: Chevron (CVX), ConocoPhillips (COP), Exxon Mobil (XOM) and Transocean (RIG). IYE has fallen 43.3% since its May 20, 2008, high.

IYE made a distribution on Dec. 23 that isn’t reflected in the chart above.

• iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) is an unleveraged path to investment in Nymex West Texas intermediate crude oil futures. It takes a fixed-weight approach to determining asset allocation of its portfolio. OIL has lost 78.5% since its July 11, 2008, high.

• The SPDR Gold Shares Fund (GLD) and iShares COMEX Gold Trust (IAU) hold gold bullion. GLD and IAU have both lost 10.9% and 11.1% respectively since their highs on March 17, 2008.

• The PowerShares DB Gold Fund (DGL) is based on the Deutsche Bank Liquid Commodity Index and is composed of futures contracts on gold and is intended to reflect the performance of the yellow metal. DGL has lost 12.6% since its March 17, 2008, high.

• Market Vectors Steel (SLX), which launched in October 2006, holds companies involved in the production of steel. Among the top holdings are Rio Tinto (RTP), Arcelor Mittal (MT.AS) and Companhia Vale ADS (RIO). SLX reached a high on May 16, 2008, but has since dropped 69.9%. On the other hand, there are high hopes for steel if President Barack Obama’s stimulus plan goes through. In the last month, it’s advanced 5.4% and moved above its short-term trend line.

SLX made a dividend on Dec. 26 that is not reflected in this chart.

• The iShares Silver Trust (SLV) holds silver bullion. Silver has a wide range of industrial applications, making it particularly attractive when there’s a boom in construction activity, but sensitive to dowturns. SLV has lost 38.3% since its March 5, 2008, high.

• PowerShares DB Base Metals (DBB) is based on an index composed of futures contracts on some of the most liquid and widely used base metals — aluminum, zinc and copper (grade A). DBB has lost 56.8% since its May 4 , 2007, high.

• iShares S&P GSCI Commodity Indexed Trust (GSG) tracks a broad index of 24 commodities weighted according to the proportion of the commodity flowing through the economy. Almost half of the index reflects crude oil, and the balance is split between other energy products such as natural gas as well as agricultural commodities, industrial and precious metals, and livestock. It hit a high on July 2, 2008, and has fallen 66.4% since then.

• An even more diversified commodity play is the iPath Dow Jones-AIG Commodity Index Fund ETN (DJP), which tracks an index that comprises 30% energy, 30% agricultural, 20% industrial metals, 10% livestock and 10% precious metals. DJP’s high was reached on July 2, 2008, but has lost 53.4% since then.

• PowerShares DB Commodity Index Tracking Fund (DBC) tracks the futures for a simplified index of just six commodities: corn, crude oil, gold, heating oil, aluminum and wheat. It hit a high on July 2, 2008, and has fallen 56.5%.

DJP made a distribution on Dec. 15 that is not reflected in this chart.

For full disclosure, some of Tom Lydon’s clients own shares of SLX, SLV and GLD and is a board member of U.S. Global Investors.

In January, the Standard & Poor’s 500 index diminished 8.6%, its worst reported opening month performance, reports Tom Petruno for The Los Angeles Times. Investors are looking for a safer place to stash away money in corporate, municipal, and mortgage bonds.

As investors flee equities, analysts are cutting away at first-quarter estimates and they now expect a 25% decline, or double the drop previously projected.

Bonds, most notably higher yielding ones such as iShares High Yield Bond Fund (HYG), fared quite well with increased investor interest, writes Gary Gordon for ETF Expert. Whereas equity ETFs like Vanguard Total Stock Market Fund (VTI), iShares EAFE Index Fund (EFA) and Vanguard Emerging Market Fund (VWO) were harder hit.

Commodities, iPath Dow Jones-AIG Commodity Index TR ETN (DJP), also slipped but the SPDR Gold Trust (GLD) posted modest gains.

Traders are starting to question the old adage of holding stocks for the long run, but a potential investor may start easing into the market by incrementally purchasing using a moving average.” It is noted that if you find yourself in a bull market, it does not mean that you should return to buy and hold methods.

Common sense suggests that the increased liquidity and consumer spending will cause inflation, which would then lead investors the relative safety of precious metals, writes Gary Gordon for ETF Expert.

Precious metal ETFs such as streetTracks Gold Shares (GLD) is 15.6% off its high but up 1.8% year-to-date, it is essentially flat for the year. PowerShares DB Precious Metals Fund (DBP) is down 6.4% year-to-date but it is noted that the ETF is up 7.59% for its 50-day moving average.

The upward trends of precious metals do not reflect the trends of other commodity ETFs, such as the PowerShares Commodity Index Tracking Fund (DBC) and the Dow Jones AIG Commodity Index ETN (DJP) which are down 34.6% year-to-date and 39.5% year-to-date respectively, that have given way under current pressures of deflation.

It just shows that precious metals, a staple for inflationary times, are doing quite well in a deflationary period. But it is noted that this paradox is because of lagging indicators of deflationary data where investors are simply amassing precious metals for what may be a lucrative golden future.

ETNs, which are close cousins of exchange traded funds (ETFs), have been bleeding investor assets after being hit with a double-whammy of credit jitters and declining commodity prices, says Ian Salisbury for The Wall Street Journal.

In September, investors extracted about $460 million from the 90 ETNs tracked by fund researcher Morningstar, a chunk of their $5.5 billion in overall assets. Although October numbers aren’t calculated yet, the general feeling is that they could be worse.

The largest ETN is the iPath Dow Jones AIG Commodity Index Total Return (DJP), which reported that about 12% of outstanding shares were redeemed during the month through Thursday.

While money has indeed been coming out of ETNs, commodity prices have declined across the board. I spoke at the Inside Commodities Conference in New York this week, where there was a great exchange of ideas and opinions. One of the questions at the conference was whether exchange traded products fueled commodity prices in 2007 and 2008, and the general consensus seemed to be yes. As those markets have corrected, there have been redemptions in commodity funds. Regardless of supply and demand issues, these ETNs did what they were supposed to do.

Lisa Dallmer, NYSE Euronext senior vice president, noted that there are $38 billion in commodities-based exchange traded products. Considering this, a nearly $500 million decline doesn’t seem quite as bad.

As far as credit risk, while each ETN has it, we feel that ETNs are overall acting as they should and that the issuers behind them are secure. An ETN is not backed by assets, however. They are unsecured debt by the issuing form and there is credit risk. If an ETN liquidates, there would only be money to give back to investors if there was money left over after the secured creditors were paid.

ETNs may also be victim, like other fixed-income products, to the overexpansion during the bull market, and will face a tough period trying to sell themselves now. The total number of ETNs available ballooned from just four in 2007 to 90 as of August 2008. ETNs are attractive, because they give investors a way to access areas of the markets that were previously off-limits or very expensive. But they’re hurting along with the broader markets these days.

There are many questions about what the future will bring with unknowable answers. Will commodities make a strong comeback? When the market recovers, will investors come back to ETNs? Will investors ever recover from their skittishness about the credit markets? Only time will tell.

Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, have lost 9.9% this week – the most since at least 1956, reports Glenys Sim for Bloomberg. The UBS Bloomberg CMCI Index of 26 raw materials is having its worst week since 1997, after skepticism that the government’s bailout plan won’t be enough to stimulate demand for commodities.

As economic weakness continues, it could continue to weigh down commodities. Oil, copper and corn all lost ground this week.

• iShares S&P GSCI Commodity Indexed Trust (GSG) lost 12.3% this week. The fund tracks a broad index of 24 commodities weighted according to the proportion of the commodity flowing through the economy. Almost half of the index reflects crude oil, and the balance is split between other energy products such as natural gas as well as agricultural commodities, industrial and precious metals, and livestock.
• The iPath Dow Jones-AIG Commodity Index Fund ETN (DJP), which tracks an index that comprises 30% energy, 30% agricultural, 20% industrial metals, 10% livestock and 10% precious metals. The fund has lost 11.4% this week.

The even the investors who love to hate ETFs know that they are practical, low-cost vehicles to reach all areas of the market, both those that had always been accessible, and those that were otherwise off-limits.

Matt Hougan and Jim Wiandt for MarketWatch set some of you haters straight by giving five ETFs you could use:

1. SPDR Gold Shares (GLD): There is no need to buy physical gold, go through needless paperwork, or join a gold pool. This ETF gives good exposure to gold, without the bullion.
2. Claymore BNY/Mellon Frontier Markets (FRN): The new frontier looks different than the ones we’re used to, as globalization has made the U.S. frontier ancient history. The latest frontier referred to when talking ETFs includes areas such as Nigeria, Kazakhstan and Colombia.
3. Rydex Currency Trust (FXE): This ETF family offers exposure to currencies of the world, with around 30 ETFs/ETNs available to all investors. Not only do you get currency return, there is also the interest rate of the local market.
4. Commodities are now a household word, and part of this is the latest explosion but the other part is thanks to ETFs. ETFs offer commodities at half the price that mutual funds can. iPath Dow Jones AIG Commodity Index Total Return ETN (DJP) is one example, with a 0.75% expense ratio.
5. Institutional strategies are also becoming everyday lingo among individual investors. The retail market has opened up to “130/30″, “buy/write” strategies, and “hedge fund replication,” with the advent of the ETF. They’re not right for everyone, but watch to see if they’ll work for you.

Read the disclosure, as Tom Lydon is a board member of Rydex funds.