Commodity Mutual FundsCommodity mutual funds provide excellent diversification and inflation protection to the average investor's portfolio. Therefore, adding a commodities mutual fund to your portfolio is highly recommended. Most commodity mutual funds are designed to track one of the various commodity indexes, and commodities indexes that are not heavily biased toward the energy sector show very little correlation with the general market and essentially no correlation with Treasury bonds. The only asset class that is significantly correlated with commodities is natural resources, which is due to the significant investments of both in energy. So, you will gain excellent diversification by adding commodities to your portfolio but you need to remember that energy is well represented in the general market and also tends to be over-weighted in most natural resources funds, so be careful you don't inadvertently overload your portfolio with energy investments. Although commodity mutual funds provide excellent diversification, the Commodity sector's performance has been less than stellar in consideration of its volatility. Indeed, the sector has underperformed the general market from 1998 through most of 2006, which is reflected in the performance of commodity funds. Commodities mutual funds did, however, do very well in 2007 and are expected to outperform the general market in at least the short term. Unfortunately, there aren't a lot of commodity mutual funds to choose from and most of them are over-weighted in the energy sector. You can avoid this over-weighting by investing in a fund that tracks the Dow Jones-AIG Commodity Index (DJ-AIG), which limits the sum of related subgroups to 33% of the index. The energy group is currently (January 2008) set at the maximum, 33%. However, the weightings are only reset once per year, so a group that is rising in price at a quicker pace than the rest of the groups can grow well beyond 33% over the course of a year. Another index that is relatively light on energy and is very well diversified is the Rogers International Commodities Index (RICI). However, the mutual funds that currently (January 2008) track this index are not traded on any of the exchanges, they must be purchased through brokerages that are authorized by the funds to sell their shares. But you may find it worth the inconvenience, as the RICI is probably the best commodity index in terms of diversity. The Rogers International Raw Materials Fund, available through Uhlmann Price Securities, tracks the RICI. (Disclosure: None required. This information is provided purely as a convenience to our visitors, many of whom landed on this page while searching for this information.) Being that there aren't many commodity mutual funds to pick from, you might have to break down and buy a load fund, an ETF an ETN or TRAKRS, if you have an account where purchasing these securities is an option. I don't know of any ETFs that track the RICI. However, the Rogers TRAKRS, which are simplified commodities contracts that trade like regular securities, are available through Uhlmann Price Securities. And the PIMCO Real Return Strategy Fund (PCRDX), which is a no load fund, is currently (January 2008) the only mutual fund that tracks the DJ-AIG. I'm not recommending that you buy this fund or the TRAKRS. You should look at the alternatives, including ETFs, ETNs and funds that track other indexes and go with the one you are most comfortable with. For instance, you may prefer a fund that tracks an index that has a larger energy component. AgricultureTo cover agriculture adequately, you also may need to invest in an agricultural mutual fund or agricultural ETFs and ETNs unless you pick a commodity mutual fund, ETF, ETN or TRAKR that tracks the RICI or the DJ-AIG, as both the RICI and the DJ-AIG have solid agricultural components, 32% and 30%, respectively. Unfortunately, the only agricultural mutual fund I'm aware of, Fidelity Select Food & Agriculture (FDFAX), has changed its name and investment strategy. It is now Fidelity Select Consumer Staples and has diversified way beyond agricultural commodities. So that leaves us with ETFs and ETNs.The following ETFs and ETNs invest solely in agricultural commodities:
Commodity Investing by ProxyInvesting in commodities indirectly by holding funds that are specific to countries whose economies are highly dependent on commodities is an alternative to commodity mutual funds. If you read the subsection on natural resource funds you should recall that I also suggested this option for natural resources, so if you follow this strategy, you'll want to do it in sync with natural resources. The economies of Australia, New Zealand, South Africa and Canada are highly dependent on mining and agriculture. But bear in mind that Canada is heavily weighted toward natural resources and energy, and South Africa is light on agriculture.
Return to the Various Types of Mutual Funds. Move on to the next subsection, Money Market Mutual Funds.
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