Commodity ETF's debut shows sector's volatility

ON THE MONEY

February 12, 2006|By GAIL MARKSJARVIS | GAIL MARKSJARVIS,CHICAGO TRIBUNE

What timing!

After the thrill of commodities during the last four years, the first commodity exchange-traded fund made its debut on the American Stock Exchange last week, during a time when investors were having second thoughts about everything from oil to metals.

The Deutsche Bank Commodity Index Tracking Fund began trading Monday - giving investors an easy way to make a quick commodity investment.

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But on Tuesday and Wednesday, crude oil, heating oil and gasoline fell to the lowest levels since the end of last year, and copper dropped 2.3 percent Tuesday, as investors worried about increasing supplies. Gold fell the hardest in two years, and palladium lost 8.8 percent after climbing 74 percent during the past year.

All have been "hot commodities" - a way to make money when stocks and bonds wouldn't help. While the Standard & Poor's 500 eked out a 3 percent gain last year, the Dow Jones AIG Commodity Index was up 21.36 percent.

The new exchange-traded fund is not a replica of either of those indexes. It invests only in light sweet crude oil, heating oil, aluminum, corn, wheat and gold, so it will have a path of its own compared to the Dow index - which invests in about 18 commodities ranging from oil to livestock.

But as the market's first commodity exchange-traded fund, the timing gives small investors, who sometimes get sucked into investing crazes at the worst of times, a moment to ponder the appropriate approach for a commodity investment. Investors were reminded last week that commodities go down as well as up.

The new exchange-traded fund will undoubtedly be used as a trading tool for speculators who intend to move in and out of commodities. An exchange-traded fund is bought and sold like a stock, so if speculators think commodities are going up they can jump in at a moment's notice, and if they think commodities are going down, they can sell instantly.

That's different from traditional commodity mutual funds, such as the Pimco Commodity Real Return Fund or Oppenheimer Real Asset Fund, which require investors to stay put until the end of the trading day.

But for longer-term investors, rather than traders, several matters should be considered before launching into this exchange-traded fund - not the least of which is how much to hold.

Commodities are notoriously volatile. The Oppenheimer fund - which is based on the Goldman Sachs commodity index but includes some bonds for added stability, as most commodity funds do - climbed 26.4 percent last year and has returned about 20 percent or more for each of the last four years, according to fund-tracking firm Morningstar Inc. But in 2001, the fund lost 31.4 percent.

In 1998, the loss was 44.85 percent, said Karen Dolan, a Morningstar analyst.

Such downturns cause average investors to run in fear, locking tremendous losses into their portfolios.

A better approach is to put commodities into a portfolio and leave them there at all times, said Roger C. Gibson of Gibson Capital Management in Pittsburgh and author of Asset Allocation: Balancing Financial Risk.

"Every class - whether stocks, real estate or commodities - has a horrible single year," he said. But holding a mixture reduces volatility and increases returns because commodities often react differently to economic conditions than stocks.

gmarksjarvis@tribune.com

Messages for Gail MarksJarvis also can be left at 312-222-4264.

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