Commodity funds can be volatile, so invest wisely


Your Money


I've read that a mutual fund containing commodities will help give my portfolio some diversification and help me make money when the stock market is down. I have heard of PIMCO Commodity Real Return. Are there other commodity funds?

- D.B., Baltimore

Some research suggests commodities should be a part of a portfolio because they respond to economic factors differently than stocks or bonds.

But since early May, investors have been getting hurt in stocks and commodities. And bonds have been losers, too. Only money-market funds and bear-market funds have been moneymakers.

Also, although commodities historically have helped investors when stocks or bonds dropped, they also can scare investors.

Commodities are significantly more volatile than the Standard & Poor's 500 stock market index, said Thomas Idzorek, research director at Ibbotson Associates. He recently evaluated 35 years of market history for a report commissioned by PIMCO, a money management company.

Recently, investors have had a taste of commodity volatility. It follows three outstanding years in which the Oppenheimer Real Asset Fund, based on the popular Goldman Sachs Commodity Index, averaged a 21.3 percent annual return.

Copper alone rose about 80 percent. Gold surged to a 26-year high after being distasteful to investors since the '80s. But as analysts became increasingly vocal and worried about speculation in commodities, the trend reversed in May. Copper lost 24 percent, and gold 20 percent.

The PIMCO Commodity Real Return fund, based on the Dow Jones AIG Commodity Index of 19 commodities, lost about 8 percent in June. Although the S&P 500 index dropped, too, the commodity index fund dropped roughly 5 percentage points more, according to Morningstar.

During the past few weeks, the hype over commodities has died down and turned into caution.

Still, based on research by Ibbotson Associates, Morningstar analyst Karen Wallace sees a valid reason to slowly put some money into commodities.

Idzorek found that during the eight years in his 35-year study when stocks were losers, commodities had their highest return: 9 percent on average a year compared with a 12.2 percent annual loss in stocks during those periods.

In the seven years when a portfolio divided 50-50 between stocks and bonds had losses, commodities also were positive, averaging 16.4 percent. And during the two years when bonds lost, commodities were winners, up 20.9 percent.

Wallace suggests the PIMCO Commodity Real Return (PCRDX) fund, which is more diverse because it is less dependent on oil than the Oppenheimer Real Asset Fund.

People who wish to trade in and out of commodities quickly might prefer a commodity exchange-traded fund, such as the Deutsche Bank Liquid Commodity Index (DBC). Rather than investing in a broad range of commodities, however, it selects only sweet light crude oil, heating oil, aluminum, gold, wheat and corn.

Wallace finds two other products interesting but too new to recommend: the iPath GSCI Total Return Index (GSP) and the iPath Dow Jones-AIG Commodity Index Total Return (DJP). Both are based on broad commodity indexes and trade like exchange-traded funds on the New York Stock Exchange. But they are structured notes, or 30-year debt securities tied to the indexes, Wallace said.

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

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