It definitely has been a volatile year for commodities, with huge swings coming in categories from crude oil and natural gas to gold to even corn. Through it all, even the elite among hedge fund managers have had a tough time getting positive returns.
Despite this, commodities still are a quality component for any portfolio. They provide exposure to alternative assets that might not have much correlation to stocks and bonds, and can provide support during times of instability or inflation.
The most common way individual investors can get this kind of exposure is through a fund, which offer diversification and provide an easier entry point into the world of futures contracts. So if you’re not scared off by 2012′s wild fluctuations, consider these 4 commodities funds to buy now:
PIMCO Commodity Real Return Strategy
The PIMCO Commodity Real Return Strategy (MUTF:PCRAX) fund, which has about $20 billion in assets, tracks the Dow Jones UBS Commodity Index. This index is composed of futures for 20 commodities across seven sectors, such as agriculture, energy, industrial metals and livestock.
An important thing to keep in mind with a fund based on a future index: When making futures trades, only a small portion of the contract amount is put up as margin. This means the fund will have lots of excess cash. But instead of getting measly returns in the money markets, the PIMCO fund leverages its bond expertise to find higher yields.
Commodity Real Return’s strategy has worked so far, producing an average annual return of close to 13% during the past three years. PCRAX charges a relatively low 1.19% in expenses for this fund type, but also a 5.5% front-end load. Minimum investment is $1,000.
Van Eck Global Hard Assets
Many commodities mutual funds usually have a heavy slug of energy stocks, such as oil majors like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). There’s nothing wrong with this approach, but it can mean missing out on growth opportunities in other natural resources.
However, the Van Eck Global Hard Assets (MUTF:GHAAX) — with $3.7 billion under management — instead tries to get broad exposure. For example, it will invest in timber, industrial metals and even REITs. Some of the top holdings include Compass Minerals (NYSE:CMP), a producer of salt and other minerals); Martin Marietta Materials (NYSE:MLM), which produces aggregates used in construction); and Calpine (NYSE:CPN), which runs natural gas and geothermal power plants).
As should be no surprise, GHAAX has had a rough go of things this year, shedding 6% to date. But the fund has been picking up momentum, with gains of 8% in the past month.
GHAAX charges 1.37% in expenses and requires a 5.75% load. Minimum investment also is $1,000.
MutualHedge Frontier Legend
Managed-futures funds focus on derivatives, such as futures, options and swaps. But they also have the flexibility to go long and short, which makes it easier to make positive returns in any type of market environment.
Managed futures are a newer trend in the mutual fund space, so there’s not much historical data to draw upon. But so far, the MutualHedge Frontier Legends (MUTF:MHFAX) fund has shown promise. It uses highly complex investment strategies and also looks broadly across the commodities markets, such as with energy, agriculture and precious metals, as well as exposure to equities and currencies.
MHFAX has seen modest gains of 3% for 2012. However, a nearly 6% expense ratio is an enormous drag on performance. The fund also charges a 5.75% load fee, and requires a minimum investment of $2,500.
SPDR Gold Shares
Gold historically has been a hedge against inflation and a safe-haven during times of panic, making it a valuable part of many diversified portfolios.
But investors often make the mistake of investing in gold funds that focus on miners. The problem? It’s not uncommon for these stocks to fall — even if gold is rising! That’s because gold miners are businesses just like any other publicly traded companies, so they also face issues like higher costs and difficulties in finding new reserves. Thus, many investors prefer to own the physical metal instead.
One of the easiest ways to do so is through the popular SPDR Gold Trust (NYSE:GLD) — a gold-backed exchange-traded fund (the metal is stored in undisclosed vaults in London) that offers very liquid trading and a low 0.4% expense ratio.
Despite the rough ride for gold prices in 2012, GLD actually is up 3% for 2012 — and that’s while many gold mutual funds have suffered losses, with several dropping 10% or more.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.