By John Waggoner –
Commodity mutual funds are hot commodities.
Fund companies are starting to roll out more funds that invest in commodities — such as iron, hogs, timber and gold — as the market for raw materials heats up.
The Rydex funds launched Rydex Commodities fund May 25, following the lead of Pimco, OppenheimerFunds and Potomac Funds, all of which also offer commodities funds.
Commodities funds usually invest part of their assets in commodities futures contracts and other derivatives that track the price of basic commodities.
Some funds focus on specific commodities. Rydex and ProFunds, for example, have launched funds that bet on the rise or fall of the dollar.
“Investors need to take a broader look at asset classes if they want to get the diversification benefits promised by modern portfolio theory,” says David Reilly, chief portfolio strategist at Rydex. Modern portfolio theory holds that mixing highly disparate investments reduces risk and increases returns over the long run.
Several studies have shown that adding commodities to a portfolio helps protect against inflationary periods, a time when stocks or bonds don’t fare well. Those periods can often last a decade or more.
In fact, commodities have clobbered stocks the past five years. The Dow Jones AIG Commodity index has soared 47% since May 2000, vs. a 15% loss for the Standard & Poor’s 500-stock index with reinvested dividends. The Dow Commodity index has gained 6.5% this year, vs. a 0.5% loss for the S&P 500.
Commodity mutual funds aren’t quite as wild as they seem. Most diversified commodity funds don’t go short — a bet on falling prices.
Because a small investment in commodity futures can pack a big wallop, the bulk of the funds’ assets are parked in Treasury bills or other income-producing investments. The Pimco Commodity Real Return Strategy fund, for example, has 92% of its assets in Treasury securities.
Also, most commodities funds attempt to track an index. That means they hold a diverse basket of products.
Nevertheless, commodity prices are volatile, and these funds can be, too.
If the fund industry starts to roll out many commodity funds, it could be a danger sign for the sector.
It takes fund companies awhile to recognize a trend. Once they spot it, it can take months to get Securities and Exchange Commission approval to offer the fund to the public. By that time, the trend is over.
In 2000, for example, the mutual fund industry launched 73 technology funds. Most suffered horrific losses.
Clearly, there’s no similar stampede to commodities funds — yet.
Source: USA Today