Since Fed Chairman Ben Bernanke hinted at a second round of quantitative easing to further stimulate the economy, commodities and their related exchange traded funds (ETFs) have become hot-ticket items.
The Fed will basically throw more money at the economy, which many believe will increase inflation and weaken the U.S. dollar, writes Abraham Bailin for Morningstar. As investors expect the Feds to increase the money supply, which in turn would devalue the dollar, commodity prices have begun shoot up – commodities have historically been a go-to hedge against inflation. [5 ETFs That Are Beating the Market.]
- PowerShares DB U.S. Dollar Bearish (NYSEArca: UDN)
One of the more notable inflation hedges is gold, with its current bull rally bringing the precious metal up to $1,300. Still, one might consider a broad commodity exchange traded fund (ETF) for some exposure to commodities. [Gold ETF Mania: Time to Stick a Fork In It?]
- iPath Dow Jones-AIG Commodity Index Fund ETN (NYSEArca: DJP)
- PowerShares DB Commodity Index (NYSEArca: DBC)
- Greenhaven Continuous Commodity (NYSEArca: GCC)
The broad-based commodity ETFs hold a variety of commodity futures contracts. Potential investors should be aware of the risks involved with ETFs that deal in the futures market, especially how rolling soon-to-expire futures contracts to the next available contract may garner losses or gains depending on the price of the next available contract. [The Commodity ETF Surge Is No Pork Belly.]
If a commodity is in “contango,” the back-month contract’s price exceeds that of the front-month contract, which would cause a fund to lose money on rolling positions. When front-month futres are more expensive than back-month contracts, the market is in “backwardation,” which would produce a positive roll yield.
DBC and the U.S. Commodity Index Fund (NYSEArca: USCI) both employ their own type of strategy that will help maximize gains or minimize losses posed by roll yields. [Commodities and Academics in One ETF.]
For more information on commodities, visit our commodity ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.