The Central Bank will keep rates unchanged, but the widening yield spreads between mortgage-backed securities (MBS) and federal agency debt against Treasuries may be an essential factor in determining the Fed’s stance on the direction of interest rates, reports Julie Haviv for Reuters. The Fed will buy $1.25 trillion allotted for its MBS program by the end of the first quarter of 2010. (ETFs to shelter against a weak dollar).

Purchase programs have inflated some securities to the point that investors are beginning to turn to the risk/reward of alternative spread products like corporate bonds. For instance, the yield spread on the 30-year Fannie Mae 4.5% current coupon stood at 1.47% over the 5- and 10-year Treasury blend, says Arthur Frank, director and head of MBS research at Deutsche Bank Securities.

The Fed’s decision ultimately could keep the dollar weak for the time being. To capitalize on continued weakness in our currency, consider some of the following ETFs:

• PowerShares DB U.S. Dollar Bearish (NYSEArca: UDN). UDN is up 7.2% year-to-date. This ETF seeks to reflect the performance of the short side of U.S. dollar – basically, the dollar goes down the fund goes up. (More on UDN and a weaker dollar).

• CurrencyShares Euro Trust (NYSEArca: FXE). FXE is up 5.4% year-to-date. A straight forex play on the appreciating euro. As the dollar depreciates against the euro, the euro gains in strength. FXE tries to reflect those gains. (More on FXE and the euro)

• iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM). EEM is up 54.1 % year-to-date. By holding non-dollar-denominated assets, such as emerging market equities, investors  can hedge against weakness. Emerging market investments get the benefit of the “dollar kicker” since assets denominated in foreign currencies are eventually converted back to weaker U.S. dollars. (More on EEM and emerging markets).

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG). GSG is up 12.5% for the year. This fund, like other commodity funds, can be a weak dollar hedge. GSG owns futures for 24 different commodities. (More on GSG and commodities).

• SPDR Gold Shares (NYSEArca: GLD). GLD is up 23.1% year-to-date. Gold is another weak dollar hedge because it’s considered a store of value. The current high supply of the dollar in the economy can result in high inflation and many investors have turned to gold as a way to protect against inflation. (More on GLD and gold).

For full disclosure, Tom Lydon’s clients own shares of EEM and GLD.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

Max Chen contributed to this article.

Copper started the week with a new year high and brokers are uncertain as to the cause, reports Andrea Hotter for The Wall Street Journal. Market fundamentals aren’t supporting any strong price gains at the moment. Copper did receive a boost yesterday after the factory orders report. (Where’s copper going?)

• iPath DJ AIG Copper TR Sub-Idx ETN (NYSEArca: JJC): up 107.8% year-to-date

The U.S. Commodity Futures Trading Commission Commitments of Traders report revealed that speculative long positions have hit a high last seen in the beginning of 2006, which means downside risk is accumulating, and the current commodities market is still bullish. Experts and analysts are divided as to how prices will pan out.

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG): up 10% year-to-date

China is the largest holder of U.S. debt, with around $1 trillion, and experts are urging China to diversify its currency holdings unless the country enjoys watching its dollar holdings depreciate in value, remarks Andrew Snyder for Today’s Finance News. Another option for China is to exchange some dollars for commodity holdings as a better way to hold value – also, better for commodities investors gazing at those price upticks.

• PowerShares DB U.S. Dollar Index Bearish (NYSEArca: UDN): up 7.4% year-to-date

Natural gas inventories are almost topped off  with a little more than 3.7 trillion cubic feet – the total country storage space is 3.9 trillion cubic feet. Snyder believes the natural gas market has ridden the commodities bubble and a correction may soon take place as the spot market corrects for the excess inventory. (How to avoid a bubble).

• United States Natural Gas (NYSEArca: UNG): down 57% year-to-date

Keep in mind that these are just predictions. Watch the markets for what really happens, and act accordingly. When investing in commodities, it’s wise to have an exit strategy that involves a stop-loss points that you can execute when the time comes. (How to protect yourself with a trend-following plan).

For more information on commodities, visit our commodity category.

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.

Investment sage Jim Rogers has exhibited his perspicacious judgment in the marketplace and identified three prominent secular trends: America’s diminishing economic prowess, emerging Chinese power and increased emerging market demand for commodities, writes John Curran for Time Magazine.

Rogers believes that the current bullish commodity cycle started 11 years ago and says that commodity bull markets usually last 18 to 20 years. He is currently more interested in the potential of gold and particularly silver. (Go here for the rundown on  commodity ETFs).

• SPDR Gold Shares (NYSEArca: GLD): up 20.4% year-to-date
• iShares Silver Trust (NYSEArca: SLV): up 56.8% year-to-date

Heather Bell for IndexUniverse offers some noteworthy tidbits from Jim Rogers’ recent speech at ETF Securities‘ mini-conference and Q&A.

China. The Chinese want to live like us and they are eager to work for it. They save more and the U.S. owes them a lot of money. According to Rogers, the Chinese are “among the best capitalists in the world.” The only foreseeable problem is with the country’s water supply, which China is actively correcting. (Read more stories on China here).

• iShares FTSE/Xinhua China 25 Index (NYSEArca: FXI): up 48.3% year-to-date

Ben Bernanke? Rogers is appalled by current governmental policies and holds the Federal Reserve chairman accountable for the devaluing of the dollar. In the mid- or long-term, the United States will be suffering from the effects of the wanton monetary policy.

U.S. dollar. People are selling the dollar and a possibly unsustainable bubble will occur, and we all know what happens to bubbles. (How to play a weak dollar).

• PowerShares DB Dollar Bearish (NYSEArca: UDN): up 7.7% year-to-date

Commodities. An increasing population is using up a finite amount of available commodities. Basic supply and demand should dictate the obvious. Rogers goes on to point out that war can result in an attempt to compete for diminishing resources, although war tends to drive up commodities prices.

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG): up 8.6% for the year

U.S. government bonds. Rogers deems short-term bonds “okay,” but advises long-term bonds as unsound. (The issues of bond ETFs).

• iShares Lehman 7-10 Yr Treasury Bond Fund (NYSEArca: IEF): down 3.9% year-to-date; yields 3.7%

Max Chen contributed to this article.

For full disclosure, Tom Lydon’s clients own shares of GLD and SLV.

According to David Nadiq for IndexUniverse, investors who are more inclined to invest in commodity ETFs have a choice in what type of ETF they use to get exposure:

Equities. Equity-based commodity ETFs are funds that hold mining companies and other companies involved in the production of various commodities. Be aware that the performance of these companies are not always correlated to their underlying commodity. In the case of coal, steel and other commodities, sometimes equity-based commodity ETFs are the only way to gain exposure to these assets in an ETF. Long-term capital gains rate on equity-based ETFs is 15%, but be sure to consult your tax professional for further guidance.

• SPDR S&P Metals & Mining (NYSEArca: XME): up 73.4% year-to-date

Physical. Physical ETFs hold the actual physical commodity. Precious metals ETF holders would own an interest in a fractional amount of the physical commodity. The small investor may consider physical ETFs over holding the physical commodity because of costs associated with storage of the commodity. Potential investors should also note that profits in bullion-based ETFs are taxed at 28%, but consult your tax professional for advice.

• iShares Silver Trust (NYSEArca: SLV): up 56.1% year-to-date

Futures-based. Most commodities are traded on futures exchanges. A future is a promise to buy, or sell, a commodity for a set price at a set date in the near future. A majority of the future contracts traded on the exchange floor are settled or swapped for cash before the expiration date.

Futures also add a time component to the price: when tomorrow’s cost is higher than today’s, it’s called contango; the inverse called backwardation. Investors should note that some ETFs have blind front-month roll strategies, but most ETFs now buy futures months in advance. None of these ETFs claim to deliver the spot price of the underlying commodity.

Futures-based ETFs are usually reported on K-1 tax forms. The profits are taxed at 60% long-term and 40% short-term capital gains rate. Read more about how ETFs are taxed here, and always consult your tax professional for advice.

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG): up 8.1% for the year

Swaps-based. Swaps recently entered the ETF conversation when the popular United States Natural Gas (NYSEArca: UNG) turned to them in order to gain exposure. Generally, ETFs that invest in swaps receive the benchmark performance through the swap. The use of swaps give investors exposure to areas of the market that can be difficult to target. Read more about the benefits of swaps here. When the Commodity Futures Trading Commission (CFTC) announces regulatory changes, swaps could become a part of even more futures-based ETFs.

For more information on commodities, visit our commodity category.

Max Chen contributed to this article.

Traditionally, financial planners and advisors have recommended that one use their age as a benchmark to gauge how much risk should be in their portfolios.  However, Jan Alexander of Forbes states that times have changed and the rules of diversification and risk-taking have followed suit.

In order to mitigate some risks and maximize the performance of a portfolio, she offers several helpful strategies:

• Do what the Ivy League School Endowments do.  Stay diversified by allocating 15%-30% of a portfolio to the following five categories: U.S. stocks, foreign stocks, bonds, commodities and real estate investment trusts (REITs).

• Use ETFs. They can help you accomplish your goals of diversification. They also offer low costs, transparency, tax efficiency and intraday trading ability.

• The dividend strategy. Choose stocks and ETFs that pay dividends.  The reason behind this is that dividends don’t fluctuate like earnings do and it enables one to more accurately forecast the performance of a portfolio.

• Look at emerging markets. Many investors have already sought out Brazil, Russia, China and India, known as the BRIC nations, because of  their economic growth and prosperity.  A good way to access the BRICs is through the use of the iShares MSCI BRIC Index (NYSEArca: BKF), which is up 67.5% year-to-date.

• Check out short-term bonds. Aas the economy recovers, interest rates will increase and the value of a bond purchased today will lose value.  A good way to do this is through the iShares Barclays 1-3 Year Treasury Bond (NYSEArca: SHY), which is up 0.4% year-to-date and has a yield of 2.85%.

• Consider alternative assets, such as commodities and currencies. As emerging markets continue to prosper, raw materials and resources will continue to be in demand. Alternative asset classes are an essential part of a well-balanced portfolio.  A good way to grab exposure to the broad based commodity markets is through the iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG), which is up 0.3% year-to-date.

In addition to considering these strategies, the most important strategy you can use is one that gets you into the markets in time for any potential long-term uptrend and has you out with a stop loss to protect yourself on the downside. You can read more about the strategy we use in The ETF Trend Following Playbook.

For more stories on strategy, visit our trend following category.

Kevin Grewal contributed to this article.

Short-term incentives and measures to stoke the economy are not fixing the real problem of sustained growth as businesses reduce payrolls, bank lending contracts, and consumers save more and spend less, comments Steven Pearlstein for The Washington Post.

The Federal Reserve took bold and necessary steps to prevent the collapse of the financial system. But the Fed also created so much liquidity that some fear that another financial bubble is forming.

As the money flew off the printers, the Fed was cutting interest rates in inter-bank lending to basically zero. However, banks kept interest rates unchanged for everyone else, and the result is that “spreads” between bank-to-bank lending and lending to everyone else are close to record highs.

The entities that are actually borrowing are hedge funds and other investors who use the money to purchase stocks, corporate bonds and commodities, pushing prices higher. Some ETFs to watch for activity include:

• DIAMONDS Trust, Series 1 (NYSEArca: DIA): up 14.0% year-to-date
• PowerShares QQQ (NasdaqGM: QQQQ): up 43.3% year-to-date
• SPDRs S&P 500 (NYSEArca: SPY): up 19.1% year-to-date
• iShares iBoxx $ Invest Grade Corp Bond (NYSEArca: LQD): up 8.9% year-to-date
• iShares S&P GSCI Commodity Indexed Trust (NYSEArca: GSG): up 4.9% year-to-date

The excess liquidity is also being used to finance new “carry trade,” borrowing at low U.S. rates to buy bonds in places with higher rates.

• POWERSHARES DB G10 (NYSEArca: DBV): up 17.7% year-to-date

The Central Bank is determined to stay its course, using anything that will strengthen the balance sheets. Fed officials won’t be increasing interest rates and reducing liquidity until they decide the economic recovery has a proper foothold.

For full disclosure, Tom Lydon’s clients own shares of LQD and QQQQ.

Max Chen contributed to this article.

Last week, a solid majority of fund types reported their best weekly inflows of the year while money market funds experienced large outflows, writes Joe Morris for Ignites.

EPFR Global data shows where all the money has moved: $1.62 billion went into global bond funds, $540 million found its way into emerging-market bond funds, $925 million funneled into the real estate sector, $1.74 billion flowed into global equity funds, and money funds lost $47.2 billion.

Some ETFs representing these areas include:

• SPDR Barclays International Treasury Bond Fund (NYSEArca: BWX): up 6.6% year-to-date

• PowerShares Emerging Mkts Sovereign Debt (NYSEArca: PCY): up 37.7% year-to-date

• iShares Dow Jones U.S. Home Construction (NYSEArca: ITB): up 37.2% year-to-date

• SPDR S&P World ex-US (NYSEArca: GWL): up 25.9% year-to-date

• WisdomTree U.S. Current Income Fund (NYSEArca: USY): up 2.1% year-to-date

Commodity sector funds also added $1 billion last week, accumulating more than $9 billion in year-to-date inflows.

• iShares S&P GSCI Commodity Indexed Trust (NYSEArca: GSG): up 2.8% year-to-date

Investors are becoming more confident, but many still remain cautious about the market. U.S. bond funds have seen net inflows every week this year and recently saw an increase by $2.79 billion. Global bond funds have seen inflows for 23 straight weeks.

• iShares Lehman 7-10 Year Treasury Bond Fund ETF (NYSEArca: IEF): down 5.4% year-to-date

Value funds are outperforming growth funds for the first time since late August. U.S. stock funds received $340 million, mid-cap ETFs, U.S. sector funds and actively managed big-cap growth funds all raked in new money as big-cap blend ETFs saw outflows.

• Vanguard Total Stock Market (NYSEArca: VTI): up 22.8% year-to-date

• Vanguard Large-Cap ETF (NYSEArca: VV): up 20.8% year-to-date

Max Chen contributed to this article.

A new Thompson Reuters/Jefferies In-The-Ground CRB Global Commodity Equity Index is expected to launch this week, and it says it will help investors bypass futures-based commodity exposure while still playing in the commodity universe.

Kevin Noblet for The Wall Street Journal explains that the index tracks the equity prices of commodity-producing companies, rather than the commodities themselves. Commodity-related equities don’t change in value as monthly contracts expire, so they can skip around the regulation imposed by the CFTC.

About 70% of the companies’ assets are “in the ground,” which is what the name of the index refers to. The companies deal with energy, precious and industrial metals, as well as agriculture products.

ETFs based on the index are in the works from ALPS Advisors and sub-advisor Arrow Investment Advisors.

Matt Kranz for USA Today says that commodity ETFs are fine for investing, so long as investors understand their risks. During inflation, prices rise rapidly, and investors, savers and bondholders all suffer. Commodity-related investments and ETFs are perfect buffers for inflationary periods.

Just beware, however, as commodities prices already reflect current inflation expectations, so you could lose money if inflation is lower than people fear.

Watch the trend lines to protect yourself.

• iShares S&P GSCI Commodity Index Fund (NYSEArca: GSG): up 5.3% year-to-date

• PowerShares DB Commodity Index (NYSEArca: DBC): up 3% year-to-date

• Greenhaven Continuous Commodity Index (NYSEArca: GCC): up 6.5% year-to-date

For more stories about commodities, visit our commodity category.

Could we be in a trough until the next bull market cycle? That’s what Jim Lowell for the MoneyShow feels. And if the improving macro trends hold up, the markets are primed for a longer-term up swing.

The latest five-month rally is setting the stage for a track back to growth, especially in China, and possibly in the United States. This puts commodities and the stocks in the companies that mine, transport, process, and sell them, in a growth position, with more room to run, Lowell says.

The bottom line is that commodities from steel to corn are already low in supply, and if a return to growth continues, the demand will outstrip the supply, possibly creating a price premium.

The projected growth of emerging market consumers, and the re-emergent growth of United States and possibly European consumers, all the world is a commodity stage. There are several ways to play the potential growth of commodities with ETFs, with both broad and narrowly focused ETFs.

However, watch the trends for opportunities – don’t rely on predictions, because unforeseen events have a way of delivering surprises when it comes to commodity prices. Read our commodities special report on the ins and outs of investing in them, then read our trend following report for how to implement a simple plan. Or for more detail, check out The ETF Trend Following Playbook!

A sample of various commodity ETFs:

• United States Oil (NYSEArca:USO): up 11.6% year-to-date

• iShares S&P GSCI Commodity Index Trust (NYSEArca:GSG): up 2.6% year-to-date

• PowerShares DB Precious Metals (NYSEArca:DBP): up 17% year-to-date

For more stories about commodity ETFs, visit our commodity ETFs category.