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By Christine Benz | 04-12-2011 05:08 PM

Think Broadly for Commodity Diversification

If you're looking for portfolio-diversification benefits, consider a broad commodity fund over a single commodity tracker, says Morningstar ETF analyst Abraham Bailin.

Christine Benz: I'm Christine Benz for Morningstar.com.

With inflation heating up, many investors are looking to commodities as a way to hedge against higher prices in their portfolios. Here to discuss what you need to know before adding commodities to your portfolio is Abraham Bailin. He is an ETF analyst who specializes in commodities.

Abraham, thanks for being here.

Abraham Bailin: Christine, thanks for having me.

Benz: So, let's talk about commodities as a way to hedge against inflation. What do you need to know when you are thinking about this question?

Bailin: Well, inflationary hedging is one of the big key stand-out benefits of a broad commodity exposure, and I say broad commodity exposure, because if you are dealing with one particular commodity, obviously, there is going to be unique drivers, pricing drivers that come into play. But inflationary hedging is definitely one of the benefits and the other is going to be portfolio diversification away from the correlation of traditional asset classes.

Now, we've had a number of identifiable drivers recently. Certainly, there has been much talk about very loose monetary policy and some of the fiscal stimulus that we've seen, and the argument to that end is that, as we print more money in the U.S. and as the same happens on the global level, hard assets denominated in those respective currencies--here in the U.S. the dollar obviously--are going to become more expensive--and while that effect isn't necessarily quantifiable, it's not hard to argue that we've seen quite a bit of it in the commodity space.

Benz: So, a question I have Abraham is, there have been some issues with exchange-traded funds and notes that focus on commodities being imperfect trackers of actual commodity prices.

Let's talk about that. Should that be an impediment to investors when they are thinking about these categories? Should this be a reason to stay away?

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