Friday, January 15, 2010

Commodity ETFs As A Way To Play The Coming Hyper-Inflation

Before launching into this essay, we must first make a distinction between an ETF (Exchange Traded Fund) and an ETN (Exchange Traded Note).

An  ETN is a senior, unsecured, unsubordinated debt security issued by an underwriting bank.  Similar to other debt securities, ETNs have a maturity date and are backed only by the credit of the issuer!  Therefore, they carry "counter-party" risk, as do derivatives.

ETNs are designed to provide investors access to the returns of various market benchmarks. The returns of ETNs are usually linked to the performance of a market benchmark or strategy, less investor fees. When an investor buys an ETN, the underwriting bank promises to pay the amount reflected in the index, minus fees upon maturity. Thus, an ETN has additional risk compared to an ETF - upon any reduction of credit ratings or if the underwriting bank goes bankrupt, the value of the ETN will be eroded.

For those reasons, I think ETNs should be avoided while ETFs are much, much, safer.

The number of ETFs and ETNs for that matter, have exploded in issuance and continue to do so.

If you want to play various commodities or even currencies, a number of ETFs exist for that purpose.

In the Metals sector, ETFs exist for Platinum (PPLT), Palladium (PALL), Gold (GLD) Silver (SLV) and Gold and Silver Mining Stocks (GDX and GDXJ).

As to Agriculture, one can play overall agri-business with DBA.  A rather large variety of  currencies have ETFs.  One can invest in the Australian Dollar (FXA), Brazilian Real (BZP), Canadian Dollar (FXC), Chinese Yuan (CYB), Euro (FXY), Indian Rupee (ICN), Mexican Peso (FXM), Pound Sterling (FXB),
Russian Ruble (XRV), South American Rand (SZP), Swedish Krona (FXS) and Swiss Franc (SXF).

Other commodity-related ETFs include Oil (USO) and (USL), Gasoline (UGA), Heating Oil (UHN) and Natural Gas (UNG).

Before you dive-in, make sure that the ETF does indeed accurately track the underlying index!  One ETF that has done an abysmally poor job is USO, which has embarrasingly underperformed oil prices.  I've also expressed concerns about GLD in prior essays.

A couple of other interesting ETFs include meat products (MOO) and water resources (PHO).

Note:  I'm NOT recommending any of these.  The only ETF I have experience with is TIP, which mimics Treasury Inflation Protected Securities ( and GDXJ..

Tommorow, we'll cover some interesting ways of hedging against inflation without going through the ETF route.

Thanks for reading!

Marko's Take

1 comment:

Take me on!