The Top 10 Commodity Funds of 2010

All that glitters is not just gold. It’s coffee and cotton and carbon too. A number of commodities have been having a banner year, driven by combinations of global demand, a weakening US dollar and a move back by institutional investors into commodities as an investment.

You’ve undoubtedly heard of gold’s move higher. The coveted metal hit $1,350 an ounce in October in the futures market- that’s a record high, although adjusted for inflation it is still about 50% below the early 1980s peak. But it is not just gold rallying, it’s lesser-watched metals and soft commodities. Cotton has surged 65% from the start of the year through October. Coffee is 50% higher. Orange juice is up 30%. Corn is up 18%.

View the Top 10 Commodity ETFs

In the past, just about the only way for small investors to play in the commodity markets was through buying futures contracts. Face values of a single contract often run well over $100,000, although most commodities can be purchased on the margin for 3% or less of face value through a broker. But that has its downside: the ferocious volatility in commodity pits can shake out individual investors quickly. Take, for instance, sugar. The primary raw sugar contract traded in New York ran up 150% in 2009 to 28 cents per pound. By May of this year, that had plunged 50% to 14 cents. In the months since, it has more than doubled again, to over 30 cents a pound. Only the Duke brothers of Trading Places fame could handle the kind of margin calls and outright stress such moves bring.

Commodity exchange traded funds (ETFs) offer an alternative to the futures market. Often times, the funds offer a more easily tradable instrument that mirrors the price commodities fetch in the futures pits or in the physical markets. Other times, they offer a blend of commodities in one instrument, such as a basket of precious metals. Some broad commodity ETFs offer a stock market traded version of one of the broad indexes, such as the CRB Index. But this year, the CRB, weighted heavily with energy commodities that have done little in 2010 such as oil, has only seen modest gains. The CRB through October gained just 3% year-to-date.

Even though commodity ETFs do shield you from some of the volatility of futures (primarily that margin call potentiality) they will still fluctuate with their underlying index or asset. ETFs also have one last downside: unlike futures you can’t opt to take delivery of the commodity. But you don’t really want 5,000 bushels of wheat yourself, right?

Still, the outlook for commodities is bullish – world demand continues to rise for everything from oil to pork bellies to wheat – and the forecasted continued weakening of the dollar is a time-proven recipe for commodities to go even higher.

To find the 10 best commodity ETFs listed here, I looked at the best year-to-date returns of commodity and natural resources ETFs as of November 3 and made my selections. Silver and gold funds have done the best this year, but there is more to the commodities world than the precious metals, so to add a little more variety than a strict top 10 list, I selected these 10 funds from the top 15 performers. One more note: many of the funds in the commodity world aren’t ETFs but ETNs, exchange-traded notes. Traded the same as ETFs, ETNs are structured notes backed by a bank, ultimately meant to track an underlying commodity. For all intents and purposes, they’re no different from ETFs, although they do introduce a slight amount of bank-related risk too. Lastly, commodities aren’t necessarily buy-and-hold type investments so go in with a point in mind at which you’ll sell to cut losses to preserve capital (a key to long-term portfolio gains) and when you’ll sell to take profits. After all, as people eat more, farmers will make more.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.