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Investment Strategies: ETFs and ETNs for big gains

Posted December 27, 2007

“In the current commodity bull-market cycle, the time has come for you to be more selective with your commodity plays… you should consider a “rifle-shot” strategy for investing in commodities to target the biggest gains.” — Mike Burnick, Sovereign Society
 
by Mike Burnick
 
Baltimore — (TFN): Investing in commodities has been a hot ticket for investors in 2007, no doubt about it. Crude oil has surged about 44% this year, while wheat prices have nearly doubled in 2007!
 
Over the last several years, some of the biggest moves in the commodities complex have come from the “headline commodities, like oil and gold. In fact, crude oil alone has jumped 215% just since the beginning of 2001. Gold isn’t far behind, with 201% gains since ‘01.
 
The industrial (or base) metals have also performed very well thanks to a strong global economy and robust construction activity earlier this decade. For instance, copper prices jumped over 300% in the past five years. In fact, copper even outperformed crude oil over that stretch.
 
But base metals have corrected sharply in recent months, due to concerns over potentially slowing global growth. Copper prices alone have fallen about 20% since early October. Crude oil and gold may also be subjected to more profit-taking pressures ahead in 2008.
 
Time to Get Selective with Your Commodity Plays
 
In the current commodity bull-market cycle, the time has come for you to be more selective with your commodity plays. A “shotgun” approach won’t work as well in 2008 and beyond. Instead, you should consider a “rifle-shot” strategy for investing in commodities to target the biggest gains.
 
Fortunately, the ever-growing landscape of exchange traded funds (ETFs) gives you a great opportunity to zero in on some specific sectors of the commodity market, to zero in on potentially bigger gains. Let’s take a quick look at the growing lineup of commodity ETFs…
 
Barclays Bank is already one of the global leaders in ETFs with its popular iShares family of funds. This ETF innovator recently launched eight new exchange traded notes (ETNs) that track individual commodity sub-indexes.
 
What Separates an ETF from an ETN
 
I should digress briefly to mention that ETN shares DO NOT represent fractional ownership of the fund’s underlying assets.
 
By contrast, ETFs DO allow you to hold fractional ownership. For example, the iShares Dow Jones U.S. Energy Sector ETF (symbol: IYE) holds shares of Exxon Mobile in its portfolio. So if you own IYE, you are in essence a fractional owner of Exxon.
 
In fact, ETFs are structured in such a way that if you own enough shares of IYE (we’re talking very large numbers of shares) you can actually contact Barclays and ask them to redeem your IYE position for individual shares in all of the portfolio’s underlying stocks. Big institutional investors do this all the time. This is the reason why ETF market prices stay so close to the underlying net asset value of its holdings (unlike closed-end funds).
 
Instead of offering partial ownership of a fund’s portfolio, Barclays ETNs are debt securities. So a Barclays ETN is essentially a bond issued by Barclays Bank. However, you don’t receive a fixed return like a bond does. Instead, your ETN is linked to the performance of the underlying index, minus Barclays’ management fees of course.
 
ETNs Have a Shorter Life Span and Face Potential Credit Risks
 
Also ETFs have an indefinite life span, whereas ETNs have a stated maturity date (just like bonds), usually around 30 years. If you’re the type of investor who plays a market trend over a period of 6 -months to a year or more, then ETNs maturity date isn’t really a big deal.
 
ETNs also involve more risk than ETFs. Not only are you assuming market risk (there’s always a chance that the underlying index may go up or down); you are also assuming credit risk by owning an ETN. It’s just like owning any other bond.
 
In other words: Will Barclays pay up when your ETN matures? Frankly, it’s not that big of a concern with large, A-rated banks like Barclays. These banks have reputations to protect, so they’re likely to stand behind their ETNs. But still, you should be aware that it is a “potential” added risk to owning an ETN.
 
Now that you know the ins and outs of ETNs, here are some of Barclays most interesting new funds targeting specific commodity sectors that might be worth watching in 2008…
Which Commodity-Backed ETFs Are On the Way Up in 2008
 
As mentioned above, wheat prices have been on fire this year, along with soybeans and corn. If you think the “grains” will continue to perform well in 2008, then Barclays has a new ETN for you. It’s called the iPath DJ-AIG Grains Total Return Sub-Index ETN (symbol: JJG). This ETN gives you indirect exposure to all of the leading soft commodities in a single transaction.
 
Perhaps you’re more of a meat-eater than a fan of the grains, well Barclays has also rolled out the iPath DJ-AIG Livestock Total Return Sub-Index ETN (symbol: COW). You’ve gotta love that ticker symbol!
 
There are other new iPath offerings that target copper (JJC), nickel (JJN) and all the industrial metals as a group (JJM). But the one I’ve got my eye on for a big potential move over the next few months is the iPath DJ-AIG Natural Gas ETN (GAZ).
 
If Old Man Winter would just cooperate with some frigid weather in January and February!
 
Your friend,
 
MIKE BURNICK, Senior Editor and Analyst for Global Market Investor. 
 
P.S. The wide world of ETFs and ETNs keep expanding by the day, and they’re offering today’s global investor more choices than ever before. In fact, I just recommended a NEW ETF to my subscribers in Global Market Investor that tracks all of the red hot agriculture commodities in a single fund. To find out more about this ETF that’s poised to soar in 2008 and all of my other Global Market Investor picks, test-drive Global Market Investor NOW!
 
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Posted by TFN-Investment Strategies · Filed Under Investment Research, Investment Strategies 

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