As the Commodity Futures Trading Commission (CFTC) mulls over position limits for futures-based commodity ETFs, many providers are launching commodity equity funds to help sidestep the issue altogether. (The four types of commodity ETFs).

Cinthia Murphy for Index Universe lays out the facts:

• It’s not a one-to-one relationship. The long-term correlation between equities and futures is good, but not perfect.
• Investing in commodities-linked equities can be more volatile than tracking spot prices of commodities, warns Ed Lopez, product manager for Van Eck. “Any small movement in spot prices can actually affect producers greatly,” he says.
• Futures-based commodity index products may, over time, demonstrate significant tracking error against spot indexes because of the influence of contango, which is when the futures prices is above the expected future spot price.
• Equities are performing better than futures this year. Many investors may be a little skittish of futures while the CFTC officially decides what the limits will be. (How to avoid bubbles).

For more stories about commodities, visit our commodity category.

Some equities-based commodity ETFs:

• ALPS ETF Trusts Jefferies TR/J CRB Global Equity Index Fund (NYSEArca: CRBA)
• Market Vectors Agribusiness (NYSEArca: MOO)
• Market Vectors RVE Hard Assets Producers (NYSEArca: HAP)
  
• SPDR S&P Metals & Mining (NYSEArca: XME)

As economies around the globe start to recover, the demand for commodities, such as crude oil, gasoline, steel and timber will follow.  Additionally, as emerging nations develop and populations continue to grow, the demand for agricultural-based commodities, such as sugar and cotton, will increase as well.  The problem that lies ahead for investors is accessing some of these commodities, in particular those that hold hard assets. (Why commodity ETFs are a solution).

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

It turns out, that getting exposure to hard assets with low correlation to other asset classes isn’t as easy as it sounds. Although a host of fairly new exchange-traded products based on commodities are available, the only ETFs backed by physical commodities are in precious metals, reports David Bogoslow of BusinessWeek. This, perhaps could be a reason that many investors turn to commodities ETFs that utilize futures contracts, such as United States Natural Gas Fund (NYSEArca: UNG). (Regulators hurt commodity ETFs?). Be sure to look under the hood when investing in commodity ETFs to know how it’s constructed.

Investors do have the choice to gain exposure to hard asset producers, as well, through such funds as the RVE Hard Assets Producers ETF (NYSEArca: HAP), which is up 35.9% year-to-date. (There are 4 different commodity ETF types – do you know them?)

Kevin Grewal contributed to this article.

There are various ways to invest in the commodities market, each with its pros and cons, and one way to invest in hard asset ETFs is through the equities market, according to Hard Assets Investor.

“As hard assets, they are the building blocks of world economies, and they can be a building block of a portfolio,” Ed Lopez, marketing director at Van Eck Global, says. Lopez notes that as global economies recover and grow, it’s going to push demand for these commodities higher, putting pressure on prices.

Adam Phillips, director of sales at Van Eck, says that both equity commodity ETFs and physically backed or futures-based ETFs can co-exist in a portfolio and be complementary.

One argument in favor of investing in hard asset equity ETFs is that you may know a little about a particular commodity, but the person running a company involved in mining or producing that commodity is duty-bound to know a whole lot more.

Still, it is important to know that while the underlying hard asset and the company that mines it are correlated to an extent, there some differences:

• Like any other company, these firms can have things go wrong, including  mismanagement, corruption, environmental disasters, labor strikes, lawsuits and more
• Companies also hedge their exposure to commodity price oscillations by using futures contracts to lock in in prices, which means that the company may not benefit if commodity prices rise

However, commodity producers can just as likely make brilliant business decisions, and they can also benefit when new mines are discovered and they can cut costs and boost profits.

Tax-wise, long-term capital gains on equities are set at 15%. (Read more on how ETFs are taxed).

Foster and Phillips say that investors should approach hard asset ETFs as equities, since they have a higher correlation with equities than commodities. “In normal markets, they’ll have a positive correlation with the broader equity markets,” Phillips says.

For more information on commodities, visit our commodity category.

Some related miner ETFs include:

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

• Market Vectors Gold Miners Fund (NYSEArca: GDX) : up 73.4% year-to-date

• Market Vectors Steel Index ETF Fund (NYSEArca: SLX): up 73.4% year-to-date

• Market Vectors RVE Hard Assets Producers Index (NYSEArca: HAP): up 40% year-to-date

• PowerShares Global Coal (NYSEArca: PKOL): up 115% year-to-date

Max Chen and Heather Hayes contributed to this article.

Hard-asset ETFs can be used to both diversify a portfolio as well as protection from both inflation and broader market turmoil, comments Don Dion for TheStreet.

Some hard asset ETFs don’t hold futures or physical commodities. Instead, these funds track indexes made up of the stock of commodity producers. Some broad equity-based, hard-asset ETFs include:

• SPDR S&P Metals & Mining (NYSEArca: XME), currently up 66.8% year-to-date, includes U.S. metals and mining companies. The fund has an expense ratio of 0.35%.
• Market Vectors RVE Hard Assets Prod ETF (NYSEArca: HAP), currently up 29.9% year-to-date, this fund seeks to reflect the Rogers-Van Eck Hard Assets Producers Index, which is often quoted as the definitive commodity equities benchmark. HAP also holds water and renewable energy components in its portfolio.

iPath offers both broad and specific exposure to hard assets with a line of exchange traded notes (ETNs) that track the futures contracts and Treasuries. Potential investors in these ETNs should be aware of regulatory actions that the Commodity Futures Trading Commission (CFTC) may impose.

• iPath DJ AIG Ind Metals TR Sub-Idx ETN (NYSEArca: JJM): up 45.6% year-to-date; includes a basket of commodities.
• iPath DJ AIG Tin TR Sub-Idx ETN (NYSEArca: JJT): up 42.3% year-to-date
• iPath DJ AIG Platinum TR Sub-Idx ETN (NYSEArca: PGM): up 32.5% year-to-date
• iPath DJ AIG Lead TR Sub-Idx ETN (NYSEArca: LD): up 114.7% year-to-date
• iPath DJ AIG Aluminum TR Sub-Idx ETN (NYSEArca: JJU): up 10.5% year-to-date

ETF Securities has successfully launched global physical-asset ETFs:

• ETFS Silver Trust (NYSEArca: SIVR): up 9.8% in the last month
• ETFS Gold Trust (NYSEArca: SGOL): down 1.3% in the last week

Larry Swedroe, principal and director at Research at BAM advisor Services and at Research for Buckingham Family of Financial Services, says that purchasing commodities is a way to protect against supply shocks and event risks that could negatively influence a portfolio of stocks and bonds, according to iStockAnalyst.

Swedroe also argues that position limits on commodity ETFs are “purely politically driven,” which could create conditions of more volatility. The ultimate outcome, he says, will result in the value of contracts being driven higher and people having to pay more for insurance.

For more information on commodities, visit our commodity category.

Max Chen contributed to this article.

The decline in the price-to-earnings ration is such companies is the biggest of any group in the benchmark index, and it has the companies 23% less expensive than their historical average, Michael Tsang and Lynn Thomasson for Bloomberg report.

Hedge funds are finding it hard to stay away, finding that the opportunity is too good to watch from the sidelines.

Analysts expect that the 29 commodity producers in the S&P 500 will earn an adjusted $10.26 per share in 2010. This 87% increase is substantial and the largest of any S&P 500 industry. A number of factors are at play, but the biggest one is an expected improvement in global demand that could lead to profits for these producers.

Watch the trend lines to see what materializes as the global economy recovers.

• Market Vectors Agribusiness (MOO): up 38.6% year-to-date

• Market Vectors RVE Hard Assets Producers (HAP) up 26.7% year-to-date

• iShares Dow Jones U.S. Oil & Gas Ex Index (IEO): up 21.9% year-to-date

For more stories about commodities, visit our commodiy category.

In an interview with the Economic Times, global investor Jim Rogers suggests that with the combination of rising stocks and widening fiscal deficits, a currency problem, if not even a crisis, is inevitable.  Rogers states that even though stocks could hit record levels, they may be in currencies that are completely worthless.  This, in addition to inflation, and interest rate hikes could potentially lead to another economic disaster.

To alleviate this predicament, he suggests focusing on commodities and agriculture.   One reason behind this is that the global population is close to its peak and, for awhile now, people have been consuming more than they have been producing.  As for the future, Rogers thinks that those who produce real goods will be the wealthiest and most valuable.  After all, this isn’t the first time he has preached using commodities as the economy recovers.

There are a variety of ways to play commodities, including these:

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

• PowerShares DB Agricultural Fund (DBA): up 7.5% for the year

• Market Vectors RVE Hard Assets Producers (HAP): up 25.9% for the year (this ETF is based on an index Jim Rogers created)

Regardless of whether or not you do decide to follow Jim Rogers’ recommendations, remember to keep basic these investment principles in mind: always know what your portfolio holds and in what currency denominations, stay diversified, have a strategy and keep yourself educated on current economic news.

Kevin Grewal contributed to this article.

The new Claymore funds will be all equity-based, writes Lara Crigger for Hard Assets Investors. They will have 80% of their constituent stocks picked out by using traditional qualitative methods from Delta Global Advisors. Delta Global will pick companies with $400 million market cap or more, and use a “top-down approach to global markets and infrastructure-related sub-sectors” and a “bottom-up approach to individual companies.”

The challenge lies in the performance. Last year, 70%  of all actively managed U.S. equity funds underperformed their benchmarks. These new funds may fare better with lower expense ratios and investors will be happy if the funds can provide the alpha. Investors may sit on the sidelines to see how they do first before jumping in.

The three newly filed actively managed commodity equity ETFs include:

Claymore Delta Global Infrastructure Fund. It will cover infrastructure and emerging markets by picking out companies involved in world construction, which includes miners, basic materials suppliers, utilities, telecoms, infrastructure engineers, water infrastructure, and road, rail, port and airport builders and operators.

Similar funds:

• SPDR FTSE/Macquarie Global Infra 100 (GII): down 8.5% year-to-date
• First Trust ISE Glb Engnrg And Const Idx (FLM): up 8.6% year-to-date
• PowerShares Emerg Mks Infrastructure (PXR): up 35.8% year-to-date
• iShares S&P Global Infrastructure Index (IGF): down 4.7% year-to-date

Claymore Delta Global Hard Assets Fund. Companies included will benefit through both the ups and downs in hard commodities prices, which includes mining, processing and selling hard commodities. Hard commodities include precious metals, base metals, energy and energy services.

Similar funds:

• iShares S&P North Amer Natural Resources (IGE): up 12.4% year-to-date
• Market Vectors RVE Hard Assets Prod ETF (HAP): up 20.8% year-to-date

Claymore Delta Global Agribusiness Fund. This will have companies that deal with growing, selling, processing or trading a agricultural commodities such as corn, soybeans, wheat, sugar, palm oil, cotton, oats and fruit. Biofuel companies may also be included.

The Claymore agribusiness fund will have to compete against the Market Vectors Agribusiness ETF (MOO), which is up 32.1% year-to-date.

If there are a actively managed commodity ETFs, then why not actively managed commodity futures funds? The ETN ELEMENTS S&P CTI ETN (LSC), currently down 9.7% year-to-date, takes the long and short positions in various commodity futures according to trends.

Max Chen contributed to this article.

Rogers has reportedly placed a cover on his short positions in financial stocks as of now, but do not take this as a sign that the markets are restored to full health.

Just because Rogers is not betting that big banks will fall much farther doesn’t mean they wont, and it does not mean that they are ready for a recovery rally either. Evidently the feeling is mutual toward the U.S. stocks in general, reports John Kimelman for Barrons. Says Rogers, “I am skeptical about the rally, and the world economy for the next year or two or three,” he says. “But if stocks go down, I can make money with commodities.”

Rogers gained fame as George Soros’ hedge-fund partner in the 1970s and 1980s. This Alabama native is a key player in popularizing the commodity market, and he developed commodity indexes based on futures contracts that in recent years have been turned into ETFs available to all investors.

In a recent interview with Barron’s he stated, “I am not buying U.S. companies mainly because I think we may have seen a bottom but I don’t think we have seen the bottom.” He also points out that In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

His faith and enthusiasm in the commodities market is evident and can be accessed through his ETF:

• Market Vectors RVE Hard Assets Producers ETF (HAP): down 0.9% year-to-date

Jim Rogers, chairman of Rogers Holdings, feels that commodities will be the place to have your money when the United States comes out of the downturn. Since farmers cannot get loans, they can’t get their fertilizer, and nobody is opening a new mine, leaving supply problems open to shortages, says Rogers.

Eventually, a lack of new supply will lead to shortages again, and since the fundamentals of commodities are still in place, prices will rebound nicely, reports Nigel Stevenson and Brett Foley for Bloomberg. Rogers singles out crude oil and agriculture commodities as the most likely to have shortages.

Rogers has not sold off any commodities since the downturn, and feels that crude oil, cotton, zinc, and agricultural commodities have the biggest opportunity.

• iShares S&P GSCI Commodity Indexed Trust (GSG): down 47.2% year-to-date; includes commodities weighted by world production; energy, oil, industrial metals, commodities

• Market Vectors-RVE Hard Assets Producers (HAP): launched in September 2008

It is actually quite simple: hard assets are natural resources and commodities that are mined or harvested and play a pivotal role in the production of goods and services, as well as investments with intrinsic value.

Some good examples of hard assets include oil, natural gas, gold, farmland, cotton, and commercial real estate.  They constitute the building blocks of economic growth in that they account for 16% of world output, comprise the largest non-financial sector in the global economy, and play a significant role in total stock market capitalization, states CommodityOnline.

Hard assets are generally classified under six categories – energy, agriculture, base metals, precious metals, forest products, and water and renewable energy.  The RVEI, formed by Jim Rogers, comprehensively covers these six market areas and gives good exposure to the stocks of the major players engaged in the production and distribution of hard assets.

Van Eck Global states that hard assets are a great option to diversify portfolios, yield competitive returns, hedge against inflation, give exposure to key global economic sectors, and complements other alternative investments.

The sector breakdown in the index as of Sept. 30 is 42.6% energy; 29.2% agriculture; 12.2% industrial metals; 8.1% precious metals; 4% paper and forest products; and 3.9% alternatives.

HAP is down 13.4% in the last month, and was launched on Sept. 3.