Crude oil has made its way to $60 per barrel. You can't go from $35 per barrel to $60 per barrel without an underlying investor belief in the eventual return of genuine global demand.
Similarly, the Powershares DB Base Metals Fund (NYSEARCA:DBB) has risen 25% in 2009, suggesting a resurgence in demand for aluminum, zinc and copper. In essence, people around the world are producing goods.
And streetTracks GoldShares (NYSEARCA:GLD) has held steady near the $90 level for most of the year, suggesting that $900 per ounce gold is not going to be brushed aside very easily. Clearly, commodities across the board are winning the day.
But are they winning the day as a means to diversify one's investment portfolio away from other asset classes (e.g., stocks, bonds, etc.)? Or is it more about the return of worldwide economic growth? Perhaps it might even have something to do with dollar devaluation and/or inflation?
Whatever your take on the current commodity upswing, you may not feel comfortable with the volatility that investing in "stuff" represents. If you're a bit queasy about those ups and downs, don't select a single metal or single agricultural product; instead, consider a 5% exposure to the Powershares DB Commodity Index Fund (NYSEARCA:DBC) where you'd get broad access to "ag," base metals, precious metals, oil and gas.
For those who are looking to hedge against inflation, however, you might want to consider something else entirely. The SPDR DB International Government Inflation-Protected Bond Fund (NYSEARCA:WIP) corresponds to an inflation-linked basket of government bonds outside the U.S. The current yield may be an unimpressive 3%, though the 12-month annual yield is closer to 6%.
For those expecting inflation to pick up then, an anticipated 6% annual yield distributed monthly may be desirable. Moreover, the average credit quality is a solid Aa3.
The SPDR DB International Government Inflation-Protected Bond Fund (WIP) has also shown the ability to appreciate in price. In fact, WIP has really never looked back since the stock market lows of early March. It's gained a healthy 12% off those lows and it has recently entered a technical uptrend.
Bear in mind, the U.S. dollar is already showing signs of strain. Since global growth is likely to resume, while hyper-inflation is likely to be contained, WIP may be an ideal way to hedge against U.S. dollar exposure.
So the benefits of WIP are multi-faceted:
1. If inflation rises, your principal will remain intact and you'll collect a solid stream of income.
2. If the U.S. dollar decreases, WIP would appreciate in value. You are effectively investing in foreign bonds with currencies that would be rising against the U.S. dollar.
3. If stocks fall, there's no historical correlation to WIP. In fact, the S&P 500 has a slight negative correlation to foreign bonds, but not necessarily a significant one.
In effect, you have non-correlating assets in your portfolio, which is the heart of true diversification; specifically, your protfolio can still zig independently of whether stocks are zagging, zigging or spelunking!
Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.