SAN DIEGO (ETFguide.com) - If soaring
commodity prices hasn't caught your attention, then maybe the number of
exchange-traded products tracking them will.
Through the first quarter, there
were 17 such products tracking both broad sector and single commodity indexes.
One such example is an exchange-traded note (ETN),
known as the iPath Dow Jones AIG Commodity
Index (NYSE: DJP) which was launched in mid-2006. As a commodity basket, this
index note tracks the price of 19 different commodities. Included in this group are all
of the usual suspects, including crude oil, unleaded gas, copper, gold, and silver.
At the end of 2006, the Dow AIG Commodity Index
experienced five-year annualized returns of 16.10 percent. Over the same period
of time, it handedly
outperformed key stock indexes like the Dow Jones Industrials, Nasdaq-100, and
S&P 500. Even bonds, as measured by the broad Lehman Aggregate Bond Index, badly
underperformed commodities. Who says stocks and bonds give you all the
diversification you'll ever need?
Perhaps, the biggest selling point of commodities is their
negative historical correlation to stocks and bonds. On any given day, if commodities are zagging, everything else is zigging and vice versa. For portfolios with exposure
to all of the above, this renders the valuable service of reducing volatility by
increasing diversification.
Toss in the fact that commodities have long been considered an excellent hedge
against inflation and their usefulness becomes even further cemented.
For sure, diversification isn't what
it used to be. Slowly, investors are coming to the realization that true diversification
can't be achieved through stocks, bonds, and real estate alone.
If stellar performance still isn't enough to earn
commodities their rightful place, then maybe the wave of commodity linked exchange-traded trusts
will help them along. Without a doubt, these products have
made it more convenient for investors to gain affordable and convenient market
exposure to commodities. Long
gone are the complicated days of buying futures or having to take physical
delivery of corn husks.
