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Large mining trucks haul waste rock away at the Copper Mountain Mine in Princeton, B.C. January 13, 2011. (JOHN LEHMANN/John Lehmann/The Globe and Mail)
Large mining trucks haul waste rock away at the Copper Mountain Mine in Princeton, B.C. January 13, 2011. (JOHN LEHMANN/John Lehmann/The Globe and Mail)

Commodities

An easy way to play complex sectors Add to ...

Economics teaches us that as a recovery progresses, businesses increase production and use more energy and raw materials. This stokes price increases in commodities. And, in theory, it allows investors to make money through exposure to the commodities needed by a growing economy.

Indeed, the RBC Investment Strategy Committee supports this thesis: It has over-weighted two commodity sectors, energy and materials, in its recommended asset mix for 2011. But while investing in commodities can be profitable, it is a huge and complex area predisposed to roller coaster pricing. How best then for retail investors to buy into this asset class?

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Exchange-traded funds are one of the easiest ways. ETFs seek the returns of a benchmark index of investments (minus expenses) by buying the members of the index. In contrast to just five years ago, investors will find a healthy selection of TSX-listed ETFs based on various commodity indices.

While Canadians can buy ETFs traded on U.S. stock exchanges, broker currency conversion fees can be a significant drag on returns. For this reason, we will focus on the five main categories of Canadian listed commodity ETFs.

ETFs based on stocks of multiple commodities

Buying one or two ETFs that invest in companies representing a range of commodities is probably the easiest way to include a diverse group of commodities in your portfolio at a much lower cost than equivalent mutual funds.

The iShares S&P/TSX Capped Materials Index Fund provides market-cap-weighted exposure to some 68 Canadian companies that produce commodities ranging from gold, silver, platinum, copper and diamonds to potash, tin, timber, coal and rare earth metals.

A pair of differently constructed ETFs offer exposure to metal commodities through investing in global mining companies. The Claymore S&P/TSX Global Mining ETF provides balanced representation across five industry sub-sectors: aluminum, diversified metals and mining, gold, precious metals and minerals, and coal and consumable fuels. As its name implies, the BMO S&P/TSX Equal Weight Global Base Metals Hedged to CAD Index ETF has a more limited mandate - base metals only. In contrast to the Claymore fund, BMO hedges the U.S. currency exposure back to the Canadian dollar.

The iShares S&P/TSX Capped Energy Index Fund provides exposure to crude oil and natural gas by investing in larger Canadian oil and gas companies.

Agriculture represents a host of commodities, everything from sugar, corn, wheat, soybeans and orange juice to coffee, hog bellies, live cattle and cotton. Claymore's Global Agriculture ETF lets you tap into this diverse group by investing in agricultural companies.

ETFs based on stocks of one commodity

The best known ETFs in this space invest in gold stocks. Canadian listed offerings include the iShares S&P/TSX Global Gold Index Fund, which tracks a global gold sector index, and the relatively new BMO Junior Gold Index ETF, which focuses on North American junior gold companies.

BMO also recently launched oil-specific and natural gas-specific ETFs that invest in small North American oil or gas companies - the BMO Junior Oil Index ETF and BMO Junior Gas Index ETF). An oil-specific ETF with a twist invests only in companies involved in oil sands production (Claymore Oil Sands Sector ETF).

The other Canadian listed, single-commodity stock ETF is the Claymore S&P Global Water ETF. The fund invests in global companies from developed markets involved in water-related businesses.

Single-commodity stock ETFs for lithium, copper, uranium, timber, aluminum and steel are offered on U.S. exchanges.

ETFs that physically hold a commodity

Some ETFs in the precious metals sector cater to those who want to own the commodity itself. The Claymore Gold Bullion ETF (CGL) seeks to replicate the performance of the price of gold bullion less expenses by holding the metal itself. For ETFs that hold other precious metals - gold, silver, platinum, palladium or combinations thereof - you'll need to look to U.S. exchanges.

ETFs that invest in commodity futures

This is a simple way to get your commodity fix using the preferred vehicle of many professional commodity traders. The new Claymore Broad Commodity ETF (CBR) delivers broad exposure to the commodity futures markets with one purchase. Single-commodity ETFs for crude oil, natural gas, gold or silver are also available from some Canadian ETF issuers. Potential investors should note that this type of ETF has a reputation for not accurately tracking its benchmark index.

Leveraged commodity ETFs

If you are more of a gambler than an investor, leveraged commodity ETFs may be for you. They seek daily investment returns equal to some multiple (or inverse multiple) of the daily performance of the futures contract of a single commodity. Horizons BetaPro offers more than a dozen such ETFs based on crude oil, natural gas, gold bullion, silver or copper.

These funds have price volatility that appears to be on steroids. For example, the Comex Silver Bear Plus ETF delivered a one year return of -77 per cent while the Comex Silver Bull Plus ETF chalked up an astounding 181 per cent.

Special to The Globe and Mail



Total % returns (as of Dec. 31)

ETF

Ticker

MER

1-yr

3-yr

5-yr

iShares S&P/TSX Capped Materials Index Fund

XMA-T

0.58

35.77

9.87

19.01

Claymore S&P/TSX Global Mining ETF

CMW-T

0.59

26.02

6.05

-

BMO S&P/TSX Equal Weight Global Base Metals Hedged to CAD Index ETF

ZMT-T

0.58

42.81

-

-

iShares S&P/TSX Capped Energy Index Fund

XEG-T

0.58

11.02

0

2.79

Claymore's Global Agriculture ETF

COW-T

0.69

17.66

1.93

-

iShares S&P/TSX Global Gold Index Fund

XGD-T

0.58

26.02

10.87

10.92

BMO Junior Gold Index ETF

ZJG-T

0.55

Inception, Jan. 2010

BMO Junior Oil Index ETF

XJN-T

0.55

Inception, May. 2010

BMO Junior Gas Index ETF

ZJN-T

0.55

Inception, May. 2010

Claymore Oil Sands Sector ETF

CLO-T

0.65

14.84

-5.86

-

Claymore S&P Global Water ETF

CWW-T

0.64

6.60

-4.69

Claymore Gold Bullion ETF

CGL-T

0.53

29.12

-

-

Claymore Broad Commodity ETF

CBR-T

TBD

Inception, Oct. 2010

-

-

Comex Silver Bear Plus ETF

HZD-T

1.38

-77.36

-

-

Comex Silver Bull Plus ETF

HZU-T

1.38

181.28

-

-

Craig Porter, portfolio manager at Front Street Capital, will take your questions and offer his insight on investing in the energy sector in this live Globe and Mail discussion. Mr. Porter's CIBC Energy fund is among Lipper's top-ranked Canadian energy funds, with a three-year annualized return of 10.5 per cent. Read more on his selection process here. He also runs the Front Street Resource Fund, which was up 55 per cent in 2010.

Readers using mobile phones should read the discussion by following this link.



<iframe src="http://www.coveritlive.com/index2.php/option=com_altcaster/task=viewaltcast/altcast_code=63967aa80e/height=650/width=460" scrolling="no" height="650px" width="460px" frameBorder ="0" allowTransparency="true" ><a href="http://www.coveritlive.com/mobile.php/option=com_mobile/task=viewaltcast/altcast_code=63967aa80e" >Energy stock picks from a top fund manager</a></iframe>


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