The new investments play off of Standard & Poor’s Commodity Trends Indicator, or CTI, which bets on some commodity prices to rise and others to fall, depending on where the indicator’s caretakers think a commodity is in its price cycle. So at some point, the indicator might call for holding futures contracts that will profit from corn prices rising (a “long” position), while at the same time it might call for selling short silver futures to bet on a drop in the metal’s price.

The long/short indicator is well diversified. It tracks 16 commodities in six sectors: energy, industrial metals, precious metals, livestock, grains and “softs,” which includes cocoa, coffee, cotton and sugar. It can go long or short in all sectors except energy — the possibility of a catastrophe that could cause energy prices to skyrocket, such as a war in the Middle East, makes shorting energy too risky, according to the indicator’s developers.

The results are tantalizing. From the CTI’s creation at the start of 2004 through May 29, it more than doubled……

……Two publicly available investments mirror the CTI. One is the Direxion Commodity Trends Strategy Fund (symbol DXCTX), a traditional mutual fund. The other is an exchange-traded note, Elements S&P CTI ETN (LSC).

Annual expenses for the Direxion fund are stiff, at nearly 2%. The ETN’s expenses are fairer, at 0.75% per year. But ETNs come with a major drawback: They are essentially debt instruments of the sponsor, meaning that you could lose some or all of your money if the issuer fails.

A better option is on the way. Claymore Securities has filed papers to start an exchange-traded fund based on the CTI strategy. A Claymore spokesman says that the ETF will be available this summer and that its annual expenses will be less than 1%.

Full Story: http://www.kiplinger.com/columns/fundwatch/archive/2009/fundwatch0602.htm

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