Commodities are known for their volatility, which makes it hard for the average investor to make money with them. The broad-based Dow Jones-UBS Commodity index, which plunged 57% from July 2008 through March 2, rebounded 30% through August 7.
Yet because commodity prices don't move in tandem with stock or bond prices, adding commodities to your portfolio could actually reduce its volatility. Plus, commodities provide a hedge against inflation.
A couple of new investment vehicles attempt to address this contradiction by employing a strategy intended to make money when commodity prices sink as well as soar.
The new investments play off Standard & Poor's Commodity Trends Indicator, or CTI. The CTI bets that some commodity prices will rise and others will fall, depending on where they are in their price cycle.
The results are tantalizing. From the CTI's creation at the start of 2004 through August 7, it rose 73%. Over the same period, the Dow Jones-UBS index fell 4% (the index doesn't engage in short selling).
So if the past is prologue, the CTI may be onto something. The problem with such strategies is that the future often doesn't follow the past. Also, too much money following a strategy can ruin its effectiveness. But officials at CTI's developer, Alpha Financial Technologies, say they can combat a flood of money.
Two publicly available investments mirror the CTI. One is Direxion Commodity Trends Strategy (symbol DXCTX), a traditional mutual fund. But its annual expenses, at 2%, are excessive. Expenses for Elements S&P CTI ETN (LSC), an exchange-traded note, are only 0.75%. But ETNs have a major drawback: They are basically debt instruments of the sponsor, meaning that you could lose some or all of your money if the issuer fails.
A better alternative is on the way. Claymore Securities plans to start an exchange-traded fund based on the CTI strategy. Expenses for the ETF, which is awaiting approval from regulators, will be less than 1%.