More Good News from the Commodity Front

By Brad Zigler

This week, we've looked across the New Year's divide to recapitulate and prognosticate (with a little hip-hop back beat, that title could become a rap classic, no?). After looking at exchange-traded products [ETPs] tracking gold on Wednesday ("2008 Was Golden ... Barely"), Thursday's focus ("A Real Commodity Moneymaker") was the ELEMENTS S&P CTI ETN (NYSE Arca: LSC).

There's yet another commodity moneymaker that wasn't mentioned in either of those columns. It's fairly new, so it was screened out by Wednesday's filter. And because it's a fund comprising stocks, rather than futures or physicals, it wasn't directly comparable to the LSC note. Nonetheless, its since-inception returns are even more impressive than LSC's.

The Market Vectors RVE Hard Assets Producers ETF (NYSE Arca: HAP) was launched in November to track the performance of the Rogers-Van Eck Hard Assets Producers Index (yes, that Rogers). The RVE index is consumption-weighted, covering nearly 300 issues in six sectors: Agriculture, Energy, Base Metals, Precious Metals, Forest Products and Water/Renewable Energy sources (namely, solar and wind). The primary criterion for inclusion in the index is that a company be "principally engaged" in the hard assets industry, deriving at least 50% of its revenues from it (for companies in the water subsector, the revenue threshold is 25%).

Though we refrained from comparing the HAP apple to an ETN orange Thursday, allow us now to offer a Friday mixed fruit salad. Looking back over its relatively short life, HAP has been twice as volatile as the iPath Dow Jones-AIG Commodity Index ETN (NYSE Arca: DJP), but has outperformed DJP by more than 16 percentage points. That's more than a little remarkable considering the 76% correlation in the price action of the two instruments.

Impressive? Sure. Sustainable? We'll see.

The HAP portfolio's modestly active, averaging a daily volume of nearly 28,000 shares. Given the current spread (0.96%), you could significantly move the market if you came in with an order of 8,200 shares or more. At current prices, that'd be a $202,000 trade. For retail traders, that's not so much of an issue, but for institutional traders, it's very important. The big guys will have to tiptoe into this portfolio, assuming they can deal in a fund of this size.

Market makers are likely keeping spreads at this level because it's just not easy hedging a 300-stock portfolio. There's no derivative on the new index, so specialists have to be deep in the component stocks and/or rely upon portfolio shortcuts that leave some residual risk.

Still, with a Sharpe ratio as positive as DJP's is negative, investors looking for commodity exposure could do a lot worse than the HAP portfolio.

Market Vectors RVE Hard Assets Producers ETF (HAP)