For most precious metals ETFs, the ETF will likely hold the physical commodity, but in many cases, a commodity ETF just holds future contracts or notes redeemable by a bank, remarks Kurt Brouwer for MarketWatch. By investing in futures contracts and other so-called derivatives, commodity ETFs may diverge from the actual commodity they are tracking. [Why Commodity ETFs Underperformed Spot Markets.]

For example, United States Natural Gas (NYSEArca: UNG) plummeted around 50% in 2009 while natural gas prices only dropped around 12%. PowerShares DB Oil (NYSEArca: DBO) has gained 16% since its inception in 2007, but oil prices have jumped about 40%.

The world of commodity ETFs was shaken as regulators talked about imposing position limits on the funds, according to The Motley Fool. Commodity ETF traders suspected that some may have been exploiting the funds’ predictability of always investing in the next month’s futures contracts in which the traders would push up contract prices just before funds “roll-over” them. [CFTC's ETF Proposal.]

Commodities are still a good way to diversify an otherwise bland portfolio, but before you invest, assess your risk tolerance and act accordingly:

• If you don’t mind taking risks, narrowly focused commodity funds can give you more pure exposure to a particular commodity. With that single-commodity exposure comes more potential for volatility, though.
• If you want more safety, check out broad commodity funds that give you exposure to a diversified basket of commodities. The downside is that you won’t fully capitalize if any one commodity is performing particularly well.
• Utilize a strategy when investing in commodities. A simple one we suggest is trend following, which you can read about here.

For more information on commodities, visit our commodity category.

• iShares GSCI Commodity Indexed Trust (NYSEArca: GSG)
• PowerShares DB Commodity Index (NYSEArca: DBC)
• Greenhaven Continuous Commodity (NYSEArca: GCC)
• iPath Dow Jones-AIG Commodity Index Fund ETN (NYSEArca: DJP)
• PowerShares DB Agricultural Fund (NYSEArca: DBA)
• Market Vectors RVE Hard Assets Producers (NYSEArca: HAP)
• PowerShares DB Energy Fund (NYSEArca: DBE)
• PowerShares DB Base Metals (NYSEArca: DBB)
• ELEMENTS S&P CTI ETN (NYSEArca: LSC)

Max Chen contributed to this article.

1. EGS Dow Jones Emerging Markets Titans Composite (NYSEArca: EEG): down 5.7% in the last three months. EEG seeks to track the Dow Jones Emerging Markets Titans Composite Index, which is an index composed of a representative sample of 100 emerging market companies deemed by Dow Jones to be leaders in each of 10 sectors. [ETF Spotlight: EEG.]

Emerging Global Shares prides itself on having funds that are pure plays on emerging markets. Until recently, there haven’t been many sector-based funds focusing on emerging markets. This fund is a broad way to get that exposure if you want it.

Emerging markets productivity is improving, are a part of the next investment frontier, have greater economic freedom and account for a large portion of global GDP. [Reasons to stick with emerging markets.]

• Brazil is the top country, with 24.9% of the weighting. China has 24.3%, Russia has 13.4% and India has 13%. Other countries include Mexico, South Africa, Chile and Indonesia.
• Oil and gas is the top sector, weighted at 30.8%; financial is 22.1%; telecommunications is 11.6%; and basic materials is 9.3%.

2. PowerShares Global Progressive Transport (NYSEArca: PTRP): up 69.9% in the last year. PTRP seeks to reflect the Wilder NASDAQ OMX Global Energy Efficient Transport Index. This ETF focuses on companies that promote the advancement of efficient transportation. More countries are becoming environmentally conscious and many have already set aside billions in infrastructure projects. [How climate change can boost transportation ETFs.]

This is a first-of-its kind ETF, focusing on a sector that could have some legs as the global climate change debate (ahem)…heats up.

• Top countries include: United States 28.5%, Canada 11.04%, United Kingdom 8.03%, Taiwan 7.9%.
• Sector allocations: consumer discretionary 19.4%, energy 6.7%, industrials 59.5%, information technology 5.9%, Materials 8.6%.

3. ELEMENTS S&P CTI ETN (NYSEArca: LSC):  How the S&P Commodity Trends Indicator provides returns is a simple matter of its construction, which follows trends. This allows commodities to be either long or short (except the energy sector which is long or flat, but never short). Rather than going down with a sinking ship, the indicator can adjust its positions on a monthly basis, depending on how the individual commodities are trending at month’s end.

This fund is interesting because of the long/short approach it takes to a basket of commodities. Commodities tend to move on their own trends (for example, agriculture may be trending down while gold is hitting record highs), and this fund takes the differences into account. [How this fund works.]

Note that LSC is an exchange traded note (ETN). [The difference between ETFs and ETNs.]

• The indicator goes both long and short in six areas: energy (long or flat only), softs, grain, livestock, industrial metals and precious metals. Using a seven-month weighted moving average, the indicator then determines in what areas it will be long and where it will be short.

4. PowerShares DB G10 Currency Harvest (NYSEArca: DBV): up 22.2% in the last year. The ETF seeks to capitalize on the theory that currencies with high interest rates generally tend to rise in value relative to currencies that have low interest rates. DBV looks at the three-month interest rates of the G10 currencies and goes long on the three with the highest rates and short on the three with the lowest, making it a carry trade play. [ETF Spotlight: DBV.]

The carry-trade involves for selling a currency from a low interest rate country and using the proceeds to purchase a currency from a high interest rate country. The idea is not to capture big moves, but to exploit the spread between the two countries’ interest rates. [Playing carry-trades.]

• DBV can hold positions in any of the following 10 currencies: The U.S. Dollar, the Euro, the Japanese Yen, the Aussie, Canadian and New Zealand Dollars, the Norwegian Krone, the Swedish Krona, the British Pound and the Swiss Franc.

5. Claymore/Clear Global Exchanges, Brokers/Asset Managers (NYSEArca: EXB): up 66.7% in the last year. EXB tries to reflect the performance of the Beacon Global Exchanges, Brokers & Asset Managers Index. The Index is made of around 100 equity securities traded on global exchanges, including MLPs, ADRs and GDRs of companies that operate security exchange or brokerage/asset manage firms. The financial sector has seen a handsome recovery off the market’s March 9 low, with most ETFs up at least 100% since then. However, fourth-quarter earnings have provided mixed sentiments. [Financial ETFs, struggling but improving.]

This is a fund that could give broad, global exposure to the financial sector as the global economy continues to recover. Just watch that trend line. [How to follow trends.]

• Top countries: United States 61.8%, Japan 9.8%, Britain 6.0%, Germany 5.1%, Hong Kong 4.9%.
• 100% Financials

Max Chen 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.

As of March 20, Claymore Advisors has decided to file to turn an exchange traded note into an ETF format. The commodity-focused ETN is the ELEMENTS S&P CTI ETN (LSC) which launched in June 2008, just before the major correction commodities.

The ETN is somewhat new, however, the indicator is not.

The underlying index is constructed in such a way that it reflects current trends in commodities. This allows commodities to be either long or short (except the energy sector which is long or flat but never short). Rather than going down with a sinking ship, the indicator can adjust its positions on a monthly basis, depending on how the individual commodities are trending at month’s end.

The indicator goes both long and short in six areas: energy (long or flat only), softs, grain, livestock, industrial metals and precious metals. Using a seven-month weighted moving average, the indicator then determines in what areas it will be long and where it will be short.

The indicator determines when to be long or short in an individual commodity by using a 7-month moving average, taking only the information from the end of the month. As illustrated in the chart above, when a commodity is above the average, it’s held long. When it’s below, it’s held short.

A Giant See-Saw. Oil has been especially volatile. Last July, it peaked at $147.27 a barrel before plummeting to multi-year lows. Then it touched $50 a barrel last week, and now it’s back down below $40, says Aaron Task for the Tech Ticker. The source of this volatility has been a topic of much discussion.

But how much can we blame speculators? Task seems to feel the answer is “not much,” because we can’t blame Wall Street for everything that’s wrong in the world right now. It’s not without flaws, but there’s so much more at play, according to Barry Ritholtz at the Big Picture.

• The hot markets attract the hot money.
• Oil is priced in U.S. dollars. A weak dollar made oil especially attractive.
• Oil prices were rising in the middle of a global expansion.
• China, in particular, had a spectacular boom and was filling its Strategic Petroleum Reserves.
• SUVs and trucks were rapidly replacing cars and trucks on the streets.
• Terrorist groups have attacked supplies, while hostile actions toward the United States have disrupted prices, as well.

More Grim News. Other news about commodity sectors should be emerging soon, as well. The S&P 500’s basic materials sector is expected to show its weakest fourth-quarter earnings of all, down 69%, because of the commodity bubble burst, report Peter A. McKay Geoffrey Rogow and Rob Curran for The New York Times.

Most commodity funds have gone along for the rocky ride, but there’s an exchange traded note (ETN) many may not be aware of that is both long and short on commodities, depending on the trend. The ELEMENTS S&P CTI ETN (LSC) allows commodities to be either long or short (except the energy sector which is long or flat but never short). Rather than going down with a sinking ship, the indicator can adjust its positions on a monthly basis, depending on how the individual commodities are trending at month’s end.

The fund is above its 50-day moving average, and is up 5.3% for the last three months.

The S&P Commodity Trends Indicator is the underlying indicator for the ELEMENTS S&P CTI ETN (LSC). Although it launched in June, just in time for a big commodities correction, it’s up 13.2% year to date through Nov. 14 (while the S&P CTI Total Return is up 24.29% year-to-date from Jan. 1 through November 14.)

While the ETN is new, the indicator itself is not. Bryan O’Leary, head of U.S. Index Marketing for Alpha Financial Technologies, the creator of the S&P CTI, notes that it’s coming up on its five-year anniversary as calculated by Standard & Poor’s.

This significant milestone means that its one, three and five-year performance will now be real, as opposed to theoretical. The five-year annualized returns for the S&P CTI Total Return as of the end of October are 18.46%, outpacing its long-only competitors by a large margin. The indicator has also benefited from having been seen in a variety of commodity conditions.

“Most of the last five years, commodities have been bullish,” O’Leary notes. But that this indicator has managed to continue to perform in a challenging environment such as the current commodities bear market is especially noteworthy.

That the indicator is providing returns is a simple matter of its construction, which reflects trends. This allows commodities to be either long or short (except the energy sector which is long or flat but never short). Rather than going down with a sinking ship, the indicator can adjust its positions on a monthly basis, depending on how the individual commodities are trending at month’s end.

This chart tells the story:

The white line represents CTI; the red indicates the DJ AIG and green represents the S&P GSCI.

For a time, the major commodity indexes were more or less trading in line with one another. But in late summer, they diverged and the S&P CTI begins to steal the show.

The indicator goes both long and short in six areas: energy (long or flat only), softs, grain, livestock, industrial metals and precious metals. Using a seven month weighted moving average, the indicator then determines in what areas it will be long and where it will be short.

Earlier this year, as everything was trending up, the indicator was long in every area. In July, the indicator suffered along with everything else when the commodities decline began. But in August, the indicator began to change direction after the signal came to be short in everything – but oil.

“We don’t short oil because of geopolitical risk,” O’Leary says. All it takes is one catastrophe. “[Oil] can go infinitely higher, and this would cause a far-greater loss than acceptable for its goal of robust returns.”

For that reason, when the recommendation to short oil comes in, the indicator instead goes flat.
The indicator determines when to be long or short in an individual commodity by using a 7-month moving average, taking only the information from the end of the month. As illustrated in the chart above, when a commodity is above the average, it’s held long. When it’s below, it’s held short.

O’Leary points out that commodities tend to hit a point that they become so expensive that people will stop buying them, as we saw with oil and gas this summer. People simply began to stay home. The indicator didn’t sense that oil was nearing that price point, though, because “the indicator never looks forward, only backward,” he says. “It has to have that price input and has to end a month below the seven-month weighted moving average.”

There are several scenarios in which the indicator loses such as flat commodity prices, during disinflationary/low interest rate/low GDP periods (but not necessarily recession or depression), and when there are dramatic trend reversals, as seen in July, causing money to be lost due to whipsaws. O’Leary says that at the beginning of that month, trends as reflected in the moving averages had all sectors long just before everything changed.

However, generally, the indicator accumulates positive performance over time picking up intermediate- to long-term trends.

“Other indices assume a high correlation between all the commodities in their basket – sugar, to oil, to cattle,” O’Leary says. “This indicator allows the investor in the index the potential to profit from the independent movements of the sectors.”

For example, livestock could be rising while precious metals are falling. Investors potentially could profit from both trades.

“Even under intense pressure, the indicator held up. It’s a clever way of investing in commodities that does so by means of a very simple algorithm,” O’Leary says.

Michael Forstl, managing director at Nuveen, says they developed the ETN in part with Merrill Lynch.

“We really focus, unlike our competitors, on notes that appeal to tactical traders and more on the fee-based advisory marketplace,” Forstl says. They target advisors who are working with high-net worth individuals and practice in a fee-based environment.

The S&P CTI is more of an allocation strategy than a tactical one. “The indicator itself has the ability to adjust to market conditions.”

Forstl says the strategy works for investors who don’t want to worry every few months about what oil is going to do, or how corn is going to look in a few weeks.

“We’re trying to bring to the market strategies that have a high level of intellectual content,” Forstl says.