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By Paul Justice, CFA | 06-16-2009 05:12 AM

Don't Put Commodity ETFs on the Spot

These funds can be great tools, if you know how they work.

Paul Justice: Hi. I am Paul Justice, ETF strategist with Morningstar. Today, I am joined by Jeremy Held from Alps, the distributor of the US commodity funds. Thank you for joining me.

Jeremy Held: Thank you.

Justice: I'd like to talk to you a little bit about two very popular funds right now on the commodities space: United States Oil (Ticker: USO), and United States Natural Gas (UNG). Several billions of dollars are invested in these products now, and I think it's a great example of the way ETFs have brought a new investor experience to the market, being able to invest in individual commodities. But, I also think that, based on the feedback that we've gotten, a lot of the investors don't really understand how these markets work; you are not buying the underline commodities. Could you give a little bit of explanation as to what is going on there?

Held: When you look at commodity markets, commodities are increasingly products that people want to own and invest in. However, if you have difficulty storing a commodity, then it's hard to own the physical commodity. With gold it is a lot easier because you can store gold bars in vaults or in your house. When you own something like crude oil or natural gas that is very difficult to store, really the best way to get exposure to those is through the futures market.Read Full Transcript

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