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Commodities, 529s, and a Letter to the SEC

A roundup of investment news from Morningstar Advisor magazine.

Morningstar Analysts, 12/06/2010

Commodities and the Weak Dollar
Thanks primarily to the weakening of the U.S. dollar, commodities are becoming increasingly attractive, Morningstar research and communications manager Jim Licato says. Moreover, the Federal Reserve has committed to buy $600 billion in government bonds in an effort to further stimulate the economy.

"The depth and breadth of the global recession has required a highly accommodative monetary policy," Fed chairman Ben Bernanke wrote in a Wall Street Journal opinion piece. "Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed's balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit." He added that these policies "will likely be warranted for an extended period."

What does all this mean for investors? Well, another round of easing by the government will pump more money into the U.S. financial markets, which in turn can lead to further weakening of the U.S. dollar. And commodities, particularly those priced in U.S. dollars, may reap the corresponding rewards. Silver, gold, and live cattle were the top year-to- date performers through the end of September. Wheat, corn, and copper also performed quite well.

Before rushing to invest in this particular segment of the market, however, investors might want to examine the bigger picture. The graph illustrates the range of annual returns for a number of the most commonly traded commodities. Natural gas experienced the greatest range of returns, while the live-cattle category has been the most stable. The returns of some commodities are more volatile than others; investors might want to consider this information before they invest.

It is also important to examine the performance of commodities relative to other asset classes before adding them to a portfolio. The table displays the correlations for stocks, bonds, cash, REITs, inflation, and commodities since 1980. According to the data, commodities have negative correlation to bonds and cash and relatively low correlation to stocks and REITs. Because a well-diversified portfolio should consist of individual investments that behave differently, commodities may deserve a place in your clients' portfolios.

Morningstar Names Best 529 Plans
Laura Pavlenko Lutton, an editorial director in Morningstar's fund research group, recently introduced Morningstar's seventh annual study of 529 college-savings plans, based on months of research into more than 50 of the largest 529 college-savings plans. Morningstar's mutual fund analysts studied detailed comparisons of the plans' asset allocations, under- lying investments, returns, fees, stewardship practices, and tax incentives. The team also discussed investment strategies with the plans' program managers and talked with the states' representatives to determine how they oversee, market, and administer their 529 plans.

From this work, Morningstar developed a new analyst rating for 529 plans. The 529 plans that received top ratings are:

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