Good Funds With Commodity Exposure
Commodities are a big part of these funds' portfolios, for better and for worse.
Commodities have been making a lot of financial headlines lately, for better and for worse. Most commodity prices have risen dramatically over the past year thanks to a variety of factors, including anticipated demand from emerging markets, unrest in the Middle East, and a desire to hedge against inflation and the falling dollar. Such a dramatic rise makes a pullback almost inevitable, and indeed, the past few weeks have seen commodity prices plunge amid increased economic skittishness and the exit of many speculators. Silver, which had been among the biggest gainers in the runup, fell 27% in the first week of May after hitting a 31-year high. Oil prices fell 15% in the same week, and major commodity indexes fell by double-digit percentages from their highs before rebounding somewhat in recent days.
These price gyrations illustrate the risks, but commodities can be a valuable addition to a portfolio if they're used in moderation and treated as a diversifier. There are a variety of ways for mutual fund investors to get such exposure. The most direct is through funds that specialize in commodities, either by tracking indexes composed of commodity futures, as in the $28 billion PIMCO Commodity Real Return Strategy (PCRIX), or by owning stocks of commodity firms, as in Vanguard Precious Metals and Mining (VGPMX) or T. Rowe Price New Era (PRNEX). There is also an ever-increasing number of exchange-traded funds specializing in commodities, ranging from broad-basket ETFs such as PowerShares DB Commodity Index Tracking (DBC) to highly specialized ones such as Global X Copper Miners ETF (COPX).
Other types of funds can provide more indirect commodity exposure. For example, funds that specialize in Russia and Canada, the largest of which are ING Russia (LETRX) and Fidelity Canada (FICDX), have very high commodity weightings (typically around 50% of assets) because of the prominence of commodity firms in those countries' stock markets. More-diversified emerging-markets stock funds, such as Templeton Developing Markets (TEDMX), often have lots of commodity exposure as well, as do emerging-markets bond funds such as Fidelity New Markets Income (FNMIX).
David Kathman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.