Bright futures?

Alternatives: Uncertainty over where stocks and the dollar are heading has some people betting on commodities.

Your Money

February 13, 2005|By Janet Kidd Stewart

DERIVATIVES — Spooked by inflation and searching for the next new thing, investors are putting a fresh spin on trading strategies and investments.

Derivatives - from gold and oil futures to exchange-traded funds - were perhaps the hottest investment ticket in 2004. Futures trading in raw materials such as gold and crude oil shattered records in New York. Fueled in part by new products that appealed to smaller investors, the Chicago Mercantile Exchange saw its publicly traded shares soar more than 200 percent to become one of the 50 largest stock gainers for the year.

Exchange-traded funds - baskets of securities derived from stock, bond or commodity indexes, aimed at individual investors and traded like a single stock - soared in popularity from an upstart category more than a decade ago to a serious rival of old-line mutual funds. Barclays Global Investors' iShares exchange-traded funds captured the third-largest truckload of new investor cash, right on the heels of American Century and Vanguard, according to Financial Research Corp. in Boston.

New products were introduced allowing retail investors to speculate in gold, real estate and raw materials, as well as stocks and bonds - and more are coming.

One of the best-selling business books this year has been a new offering from Investment Biker author and celebrity investor Jim Rogers: Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market.

As of the first few weeks in 2005, the 10 biggest gainers among mutual funds tracked by Morningstar were a bear-market strategies fund and nine precious metals funds.

More recently, as of Feb. 4, mutual funds specializing in natural resources and utilities outperformed all other categories of domestic stock funds, according to Morningstar.

Rogers, for one, swears the bull market in commodities still has at least a decade to run. Historically, he said, they last about 18 years, and this one started in 1999. Cycles run long, he said, because of the time it takes for industries to identify shortages in natural resources, increase production and then, typically, overshoot to produce a glut of supply.

"The shortest bull market I could find in studying history was 15 years, and the longest was 23 years," he said. "Somewhere between 2014 and 2022, this bull market will come to an end."

For a contrarian tip for investors who feel gold and oil have been overdone already, Rogers suggests looking in your sugar bowl. Sugar prices, he says, are 80 percent below their all-time high, brought down by overproduction and worries about continued demand.

"If I'm right, even if sugar quadrupled, it would still be below its all-time high," he said. Of course, Rogers concedes, there is the brother-in-law problem.

"We all have a brother-in-law who lost his shirt in soybeans," Rogers quips, nodding to the incredible - sometimes incredibly destructive - power of margin trading in the futures markets, which allows investors to trade huge contracts by putting up relatively small amounts of cash. "The thing is, you don't have to use the leverage."

That leverage is alluring, however, and getting easier all the time for novice investors to access, thanks to a regulatory easing five years ago.

Customers who trade with E*Trade and CyberTrader (Charles Schwab's arm for active retail traders), among a handful of others, can now buy futures contracts directly from the futures pits via electronic screens that show all available prices.

Futures exchanges, in turn, have trotted out smaller-lot futures contracts, enabling smaller investors to hedge a portfolio or speculate in prices of certain indexes, all for a fraction of the upfront money an ETF would require - and at lower trading costs.

Derivatives' critics say the recent price run-up and euphoria around commodities conjures up images of the Internet stock craze in the late 1990s and emerging-markets popularity before that.

"For long-term investors, there is almost no reason to be in commodities," said Benjamin Tobias, a certified financial planner in Plantation, Fla., who believes the derivatives markets are still unfriendly places for small investors.

All that said, a murky outlook for U.S. stocks this year, predictions of continued drops in the dollar and inflation fears all point to more interest in alternative investments, experts said.

Add in high expectations for increasing demand for raw materials from the rapidly growing market of China, and you can pretty much bank on more commodities-oriented investment products in the pipeline in the coming years, said Lee Kranefuss, president of Barclays' exchange-traded fund business.

Another way to play the raw materials strategy is to focus international investments on key global growth areas. One example is Canada, rich in natural resources with a currency rising against the U.S. dollar. The Fidelity Canada fund was up 52 percent in 2003 and 24 percent last year.

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