Investors who are interested in commodities may consider trading in straight commodity exchange traded funds (ETFs) or equity-based commodity ETFs. The current market conditions seems to be favoring the equity-based investments for the time being.
According to Paul Justice, a Morningstar analyst, commodity ETFs lagged behind spot markets and equity ETFs that held oil, gas and agricultural companies companies in 2009, reports Asjylyn Loder for Bloomberg. For instance, the United States Natural Gas (NYSEArca: UNG) dropped around 50% while the First Trust ISE-Revere Natural Gas (NYSEArca: FCG), which invests in natural gas companies, increased around 50%. PowerShares DB Commodity Index Fund (NYSEArca: DBC), saw gains of around 16% in 2009, but iShares S&P North American Natural Resources Sector (NYSEArca: IGE) had a total return of around 37%.
The National Stock Exchange, an electronic exchange for U.S.-listed stocks and ETFs, reported that commodity share growth in the total U.S. ETF market increased to 9.3% from 4.6%. In 2009 alone, more than $30 billion found its way into commodity products, which was more than a quarter of all U.S. ETF inflows.
Dave Nadig, director of research for IndexUniverse, believes investors are looking into commodities because of rising demand for raw materials in countries like China, India and Brazil.
Nadig explains that some funds like natural gas, oil and wheat are still suffering through contango – when a longer-dated contract is more expensive than the one the ETF needs to sell before the expiration date, which forces the fund to pay more each month to keep its same exposure levels.