Commodities have received greater exposure in recent years thanks to a major bull rally in commodity prices coupled with new products designed to make these securities available to common stock investors. Many investors are familiar with precious metals and energy exchange-traded funds (ETFs), such as SPDR Gold Shares (GLD), PowerShares DB Oil (DBO), U.S. Oil (USO) and iShares Silver Trust (SLV), but they now have the option of investing in a variety of individual commodities and have a choice between several indexes that offer unique commodity weightings.
When oil prices rallied to $150 per share and corn prices advanced on ethanol demand, investors looked to grab a slice via ETFs and exchange-traded notes (ETNs). When commodities slid at the start of a major global recession, prices fell as much as 75 and 80 percent. Recently, several commodities have climbed off their lows, and some investors are starting to look at the sector in anticipation of an economic recovery. Commodities tend to outperform during the early phases of an economic expansion, when the rising demand outstrips the supply, due to recessionary cutbacks, and during the later stages, when demand again outstrips available supply. The point of this article is not to assess whether the economy is on the verge of a recovery—that’s a topic unto itself—but to compare the relative strengths of different indexes and investment approaches.
Any decision to invest in commodities should begin with the index funds. For the vast majority of investors, indexing makes the most sense. As with equity indexes, the securities providers have designed a plethora of ways to gain commodity exposure.