Commodities ETFs Protect The Little Guy

Includes: DBA, GSG, IAU, OIL
by: Tim Iacono

After reading this Wall Street Journal report($) about the "little guy" investing in commodities, it's hard not to come away with the impression that author Anita Raghavan is either hopelessly behind the times or still smarting from her own commodity futures trading experience gone bad.

This piece is either just an ill-informed human interest story or a true hatchet job on a growing investment sector that most of the U.S. financial industry would probably prefer the public never find out about - and if they do find out about it, to stay away from it.

How Hot Investments Burn the Little Guy
July 14, 2007

William Snell, a Missouri farmer, knew commodities cold: He grew up around corn and soybeans, and figured he could make money in the futures markets. Instead, he lost more than $1.7 million trading everything from soybeans to cattle futures.

George Roffman, a Florida doctor, last year lost nearly $1.6 million trading commodities such as crude oil, gold and unleaded gasoline -- in four months. Jaca Collins, an Atlanta homemaker, invested $170,000 in heating oil, financial futures and options -- and lost nearly all of it.

More individual investors are rushing these days into the rough-and-tumble commodities pits, long considered a backwater of the investment world, as the prices of hard assets have boomed in recent years. But some are learning a hard lesson in the risks of these sometimes-volatile investments.

One reason commodities can be rocky is the amount of borrowing used to fund trades. Investors can put down less than 10% of the value of a commodities contract, compared with a minimum of 50% of a stock's purchase price.

Glenn Swanson, president of Daniels Trading, a commodities-trading firm in Chicago, says: "The market only has to move a small percentage to...force the client to liquidate at a loss or post additional capital to hold the position."

OK, two words for Anita - ETF and index.

Anyone using 90 percent leverage on individual commodities futures contracts may as well just take that money to Vegas and work that little bug out of their system and then get on with their lives.

As someone who runs an investment website that holds a significant allocation of commodities, let me assure you that you don't have to go anywhere near a commodities exchange to invest in silver, crude oil, or soybeans, nor do you have to use leverage.

As enumerated in this summary, there are at least eighteen commodity ETFs (exchange traded funds) and ETNs (exchange traded notes) and no one has yet to "lose their shirt" on any of these.

Broad Based Commodity ETFs and ETNs
iShares GSCI Commodity-Indexed Trust ETF (NYSEARCA:GSG)
iPath Dow Jones-AIG Commodity Index Total Return ETN (NYSEARCA:DJP)
iPath S&P GSCI Total Return Index ETN (NYSEARCA:GSP)
PowerShares DB Commodity Index Tracking Fund ETF (NYSE:DBC)

Oil and Gas ETFs and ETNs

iPath S&P GSCI Crude Oil Total Return Index ETN (NYSEARCA:OIL)
Claymore MACROshares Oil Up Tradeable ETF (UCR)
PowerShares DB Oil Fund ETF (NYSE:DBO)
United States Oil Fund, LP ETF (NYSEARCA:USO)
United States Natural Gas Fund, LP ETF (NYSEARCA:UNG)
PowerShares DB Energy Fund ETF (NYSE:DBE)

Gold, Silver and Metals ETFs

PowerShares DB Gold Fund ETF (NYSE:DGL)
iShares Silver Trust ETF (NYSEARCA:SLV)
PowerShares DB Silver Fund ETF (NYSE:DBS)
PowerShares DB Precious Metals Fund ETF (NYSE:DBP)
PowerShares DB Base Metals Fund ETF (NYSE:DBB)

Agricultural Commodities ETFs
PowerShares DB Agriculture Fund ETF (NYSE:DBA)

These funds either purchase and store the underlying commodity or they buy futures contracts representing the dollar amount invested, typically parking the balance of investors' money in bonds to earn an additional return.

Some of the newer ETFs are slightly more complex but they all operate on the same principle - the "little guy" gets to keep his shirt.

As an illustration of the gains that could have been achieved in recent years with little risk of jeopardizing your financial future, the historical performance of one of the oldest commodity funds, the Pimco Commodity Real Return Fund [PCRCX], is shown below.

Don't get me wrong, I think the Wall Street Journal is one of the finest business publication in existence today, but they are not perfect. This article is a glaring example of that imperfection - maybe it would be better suited to the editorial section.

Full list of commodities ETFs and ETNs.