New products make it easier to get a pure play on commodity prices.

    Commodity-linked investments, once an arcane and shadowy corner of the investment world, are back in fashion as inflation concerns increase, the stock market meanders and rising prices spark renewed interest in investments tied to everything from oil to gold to pork bellies.
    With their negative correlation to the stock market, direct commodity plays that invest in futures contracts or the commodities themselves offer diversification that's a step beyond natural resource and commodity stocks or stock funds. They also moved toward mainstream status last year with the publication of a research study by economists Gary Gorton and K. Geert Rouwenhorst titled Facts and Fantasies About Commodity Futures. That study of an unweighted index of commodity futures between 1959 and 2004 concluded that the futures investments experienced returns similar to the S&P 500 Index, but with lower volatility. Those long-term returns were negatively correlated to both the stock and bond markets and positively correlated with inflation, although commodities often zig when financial assets zag. (A copy of the study is available from the National Bureau of Economic Research at
    Until recently the high costs and complexity associated with commodity investing kept many investors away. That began to change with the 1997 launch of Oppenheimer Real Asset fund. The fund broke the old mutual fund rules by skipping the equity middle man to focus exclusively on commodity-linked derivative instruments whose prices fluctuate in line with the value of the underlying "real asset."
    Oppenheimer Real Asset is benchmarked to the Goldman Sachs Commodity Index (GSCI). The index's commodity weightings are pegged to average production over the previous five years, and are proportional to the amount of that commodity flowing through the world economy. As of mid-March, energy accounted for 744% of the index, with industrial metals a distant second at 7%. True to its pure play pledge, the fund has performed best relative to its equity-based natural resource peers in years like 2002, when the stock market fell and energy prices rose. But it underperformed many of them in years such as 2004, when energy stocks had the tailwind of a rising stock market.
    The 500-pound gorilla in this space is PIMCO CommodityRealReturn Strategy. Since its launch in June 2002, the fund has grown to more than $7 billion in assets. Its benchmark, the Dow Jones-AIG Commodity Total Return Index (DJ-AIG), represents a diversified group of 20 commodities. It is less concentrated in energy than the GSCI because no single sector can account for more than a one-third weighting, or fall below 2%.
    A new mutual fund entrant this year, Credit Suisse Commodity Return Strategy, also seeks to replicate the Dow Jones-AIG Commodity Total Return Index. To help differentiate its offering from PIMCO's, Credit Suisse is touting its cash management capabilities. Both funds have a lot of money on the sidelines because their investments absorb only a fraction of their total portfolios.
    "This fund is unique because the cash collateral is invested in CSAM's Enhanced Cash Strategy," notes a company press release. "Whereas the DJ-AIG Index assumes the return over the T-bill, CSAM's Enhanced Cash Strategy seeks to add value over the T-bill with minimal fixed-income risk." The fund's goal is to track the index as closely as possible while adding some incremental return through cash management strategies. The duration of the cash collateral side is approximately six months, and the yield exceeds that of three-month Treasury bills by about 30 to 60 basis points.
    The PIMCO fund parks its cash in Treasury Inflation Protected Securities, or TIPS, and other fixed-income securities. The combination of inflation-indexed bonds and commodity derivatives, designed to act as a double hedge against inflation and enhance benchmark returns, may also increase short-term volatility compared to its benchmark during periods when both TIPS and commodity prices rise or fall simultaneously.
    Cash management is really a sideshow here, though. As with stock funds, the biggest driver of returns as well as volatility is the index that a fund follows. According to a study by Ranga Nathan in the Spring 2004 issue of Journal of Indexes, indexes with a greater number of components and diverse weights have had a lower standard deviation than more concentrated ones. Nathan found that the DJ-AIG and the GSCI had standard deviations of roughly 14% and 22%, respectively, during the five-year period ending 2003. The GSCI had a higher annual rate of return and a lower level of correlation to the stock market during the period.
    Another index, the Rogers International Commodity Index (RICI), serves as the benchmark for the Rogers International Raw Materials Fund, one of the better-known public commodity limited partnerships. The fund is based on an index of 35 commodities and was devised by commodities guru and sometime adventurer Jim Rogers, whose exploits are chronicled at It is weighted heavily toward energy, which represents 35% of its contracts, followed by wheat at 7% and corn, aluminum and copper at 4% each. The four-year-old fund, which has a minimum investment of $10,000, has roughly $45 million in assets. Monthly liquidity allows purchases and withdrawals once a month.
    "We don't have a large number of financial advisors who use the public fund, although we've seen a lot of interest from them," says Tom Price of Uhlmann Price Securities, the fund's distributor. Price says fee advisors often back away because of the up-front subscription charge, which was recently lowered from 6% to 5% for amounts between $10,000 and $25,000. The charge drops to 2.5% for investments up to $250,000, and 1.5% for larger amounts. Annual fees run about 1.85%.
    "We're looking into having a fund for financial advisors that doesn't have an up-front fee," says Price. "The mutual fund industry introduced flexible fee structures years ago to accommodate the market, and I think that's something we need to address as well."
    On the exchange-traded fund front, things appear to be on hold after the recent introduction of two gold-based exchange-traded funds. In November 2004, streetTRACKS Gold Shares (GLD) made a splash on the New York Stock Exchange when it broke the record for any ETF launch with record trading volume of 40 million shares in its first week on the market. A second gold ETF, iShares COMEX Gold Trust (IAU), made its debut in late January. The two ETFs have a 0.40% expense ratio.
    Unlike mutual funds, which can't invest directly in commodities, the two gold ETFs are backed by a cache of the metal itself. With photos of its gold vault in London stacked high with lucre and an updated gold bar list, the Web site for streetTRACKS Gold Shares ( drives home the message that the ETF is about as close as it gets to owning gold without schlepping bars or coins.
    That appeals to financial advisors like J.D. Steinhilber of, who uses streetTRACKS Gold Shares as part of his commodity allocation. "It's a pure form of diversification that provides an effective hedge against inflation and a devaluation of the dollar without company-specific risk," he says.   
    But the marriage of hard assets with securities has been a rocky one from a regulatory standpoint, and physical commodities like oil are difficult to store, so similar offerings have been slow to follow. Locked in an indefinite quiet period imposed by the SEC, State Street Global Advisors can't talk about streetTRACKS Gold Shares to the media or disclose any plans about products under development. "You've got the Commodities Futures Trading Commission, the Securities and Exchange Commission, and Congress involved in turf issues," says Gary Gastineau of ETF Consultants in Summit, N.J. "There are a lot of barriers here."
    Regulatory constraints are less of an issue for managed futures accounts, and individual accounts and private commodity pools are an increasingly popular option for high-net-worth clients with upwards of $25,000 to invest. Money under management in managed futures climbed to a record $131.9 billion during the fourth quarter of 2004. That's nearly double the $66.5 billion under management in the second quarter of 2003, according to The Barclay Group, which tracks industry data. "We're seeing more sophisticated investors in managed futures now," says Barclay President Sol Waksman. "They're not chasing returns and are willing to sit tight during periods of underperformance." Tracking performance of these accounts can be difficult, although services such as Barclay Trading Group ( and International Traders Research ( provide some guidance here.
    Given their volatility and long periods of underperformance in the past, some financial advisors are shunning pure commodity plays altogether and sticking with energy stock funds and other commodity-equity hybrids as diversifiers against inflation. Sheldon Jacobs, editor of The No-Load Fund Investor, prefers T. Rowe Price New Era over "purer" commodity exposure plays like PIMCO CommodityRealReturn. "Though commodity prices have a profound effect on the performance of Price New Era, the fund has been much less risky than actual commodities," he writes in the most recent edition of his newsletter. "Though Price New Era has produced losses during steep downturns in commodity prices even when the broad stock market gained, those losses have been much more subdued than in the commodities themselves." He also recommends Fidelity Canada because the Canadian stock market has a large exposure to natural resource companies and the Canadian dollar tends to rise with commodity prices.