Commodity Mutual Funds

Jim Rogers is one of the most celebrated commodity investors of all time. Many consider him to be the Warren Buffet of his field. His name is constantly mentioned on CNBC and investment newsletters and reports. But who is this enigmatic character?

Rogers graduated from Yale University in 1964 and got a second degree from Oxford in 1966. After a brief stdnt in the army he joined Wall Street. Rogers co-founded the Quantum Fund in 1970. In ten years, the fund returned 4200% while the S&P gained 47%. This amazing returns is why he is one of the biggest name in the commodities business.

In 1980 he retired and traveled around the world on his motorcycle. Since then he has hosted several television shows. He founded the Rogers International Commodity Index in 1998.

Many investors, especially those putting money into commodity futures, take inspiration from him. So what lessons can we take from his life? For one, he has written three books on investing which are widely available.

Second, he publicly bullish on two big ideas. One of them is agriculture. He sees the increasing food demands because of the population explosion and increasing wealth of the developing world. He has even bought into partnerships investing in agriculture. Second, he has taken a very strong stance on the growtth of Asia and even moved to Singapore. Keep these two ideas in mind when investing. For those wanting to just diversify their portfolio somewhat into commodities, they should consider buying into the Roger commodity fund (his index fund).

Many people want to invest in a commodity mutual fund but have no idea where to start. There are many options available, which is why some investors get confused with all the options available. Don’t panic. There are several high quality investment options that aren’t complicated that are available.

One of the best options is just simply buying an ETF. What makes them great is that they are freely-traded. You don’t need to sign up directly with the mutual fund company to buy them. You can just buy a share of the fund like you are buying a stock of a company. There are several of them available; the biggest and most reputable companies include PowerShares and iShares. They are also good in that that most of them are passively managed (designed to match an index and thus low cost) and certain tax benefits that regular mutual funds do not have.

To buy an ETF just log into your stock brokerage account and buy one. Do some internet research to find an ETF that particularly suits your needs. Try using a site like Seeking Alpha or Yahoo Finance.

Don’t despair if you don’t already have online stock broker. The market is extremely competitive. Most brokers offer big incentives for new customers; everything from discounted or free stock trades to signup bonuses. Be sure to look out for them.

It is recommended that unless you are very experienced in a financial markets to buy a broad-based commodity fund that invests in several securities. Commodity markets are frequently are significantly more volatile than stock or bonds in general. So while you might think oil will make a great long term investment, there might be a short term “dip” that could have a huge effect on your portfolio. Like with any financial instrument, diversity is key.

On this site we have discussed the big trend that add great volatility to commodities and drive a bull market: the growth of China and the developing world. Many personal finance magazines and websites recommended personal investors to allocate at least some of their capital into commodities. But what is the best way to do it?

The original way that was used by investors such as George Soros was investing in futures. This was great, because one could make a financial bet on the movement on the price of a bushel of corn without actually buying the corn. However, this might not be a good choice for most investors. These products are highly leveraged. A relatively small fluctuation in commodity prices could mean a wide swing in prices. Unless you are an expert and plan on dedicating a significant amount of time researching your investments, it is highly recommended not to start with futures.

One of the most popular and highly recommended options is the PowerShares DB Commodity Index Tracking Fund (stock symbol DBC). It is advised byDeutsche Bank, one of the largest banks in the world.

What exactly is this fund? It’s an ETF. This means you can buy a share of it like you were buying a stock. You don’t need to set up a special account with Deutsche Bank to set up an account. This is great as it is extremely convenient. There are also certain tax advantages as well. It is also linked to an index, meaning that it is extremely low-cost because they do not hire active management.

The composition of the index is fairly straightforward. The fund is 35% crude oil, 20% heating oil and 10% to 12.5% each of aluminum, gold, corn and wheat. Every year the ETF is rebalanced.

As you can see, by buying into this fund you get a broad exposure towards various important commodities. This is exactly what many investors are looking for. However, some might want to be more speculative. If you think the price of corn is ready to explode and want to put money on it, this particular ETF would actually not make a good choice because only around 10%-12.5% of your money will actually go into it. There are a number of other ETFs that are further specialized. Consider purchasing them. In some ways you could basically run your own mini commodity hedge fund, betting on the price of movements from everything from gold to pork bellies.

But what if you want someone else to do the investing for you? Commodity markets are extremely complex because prices are affected by so many factors. But with great volatility comes great opportunity; famous commodity investors such as Jim Rogers have made a killing in the market. For those wanting an actively-managed commodity mutual fund there are several options. Claymore Delta Global Hard Assets Fund might be a good choice. This particular fund invests in so-called “hard assets” such as precious and hard metals. There is also Claymore Delta Global Agribusiness Fund, which does the same to agricultural commodities. There are other fund family choices out there.

As you can see, there are many commodity investment options out there. The “best” commodity mutual fund in fact differs based on the type of investor. We personally believe for the vast majority of investors looking to add some commodities to their portfolio that the DB commodity index is the best option. It’s not as “sexy” as futures or actively-managed funds but it is low cost and low maintenance.

The popularity of commodity mutual funds has skyrocketed in recent years. From seemingly no where more and more funds keep popping up. The daily financial news scarcely go by without any mention of commodity markets. This is due to several reasons. For one, the smashing success of high-profile commodity wizards such as Jim Rogers and George Soros has highlighted the financial opportunity available. Investors are no longer content to holding plain-vanilla stocks and bonds that their parents did. Commodities, like hedge funds and private equity, are sexy investments that spice up a portfolio and add excitement. Everyone wants in on the gold rush. Second, investors are more aware of several big trends that should drive the commodity market for years to come. To give a short list: the growth of China (and the rest of the developing world), “peak oil” theory and the food crisis. All of these factors should make the commodity market volatile in the next few decades (and with volatility comes the opportunity to make out-sized investment returns).

There are several options to personal investors wanting to put some of their portfolio into commodities . Hedge funds are the most famous option. Some of the funds have had extremely high returns in recent years. But only the extremely wealthy are allowed to buy into these funds. And many of the best-performing ones are closed to new investors. Commodity index funds are another option. They are low cost because they do not have to pay the salaries of investment managers. But they are merely designed to track an index. This is good option for investors who are primarily looking to diversify their portfolio and add an asset class that isn’t correlated with stocks or bonds. Commodity mutual funds might be the best option. They are open to everyone. They are not murky like hedge funds. And they have an active management that have the ability to exploit market inefficiencies and take advantage of the trends previously mentioned.

For many years personal investors have been told that they should just stick to stocks and bonds. But the performance of financial markets over the past few years have demonstrated the volatility in these supposedly non-correlated markets. This is why many investors have started to buy into commodities.

Commodities are interesting because their performance is often not-correlated with stocks and bonds. In plain english, commodities can perform well when other parts of your portfolio are floundering. A properly diverse portfolio will help you weather crashes in various investmet markets.