Commodities across the board are sporting solid gains as the market is focused on new signs of global economic stabilization and a weaker US dollar.

In the energy market, crude oil prices rose above $60 per barrel last week, the first time in five months, before pulling back. Meanwhile, natural gas prices have increased as much as 35% since the beginning of the month.

As for precious metals, gold and silver prices have increased appromixately 14% and 33% respectively since mid-January. Even platinum, which many analysts expected to underperform this year, has increased as much as 33% since the beginning of 2009.

Less glamorous commodities, like grains, meats, and softs, have also experienced significant increases over the past several weeks. In the grain market, wheat, corn, and soybeans are all at or nearing year-to-date highs. Meanwhile, softs have been the best performer in the general commodity market. Cotton, orange juice, and coffee are up pretty big over the last few weeks. The softs market is lead by sugar. Sugar is on top of a nearly two-year high, increasing as much as 88% since June 2007.

An easy way to take advantage and profit from broad moves in the commodity market is by. . .

Investing in Commodity ETFs

Broad-based commodity ETFs attempt to track the value of a basket of commodities by holding the actual commodity in storage or by purchasing futures contracts.

Commodities are a separate asset class from stocks and bonds, so these ETFs can provide extra diversification in a portfolio.

There are a handful of broad-based commodity ETFs on the market for investors to choose from. They include:

• Dow Jones-AIG Commodity Index Total Return ETN [NYSE: DJP]
• ELEMENTS Rogers International Commodity Index ETN [NYSE: RJI]
• ELEMENTS S&P Commodity Trends Indicator ETN [NYSE: LSC]
• Goldman Sachs Commodity Index (GSCI) Total Return Index ETN [NYSE: GSP]
• GreenHaven Continuous Commodity Index Fund [AMEX: GCC]
• GS Connect S&P GSCI Enhanced Commodity Total Return Strategy Index ETN [NYSE: GSC]
• iShares GSCI Commodity-Indexed Trust ETF [NYSE: GSG]
• PowerShares DB Commodity Long ETN [NYSE: DPU]
• PowerShares DB Commodity Index Tracking Fund [NYSE: DBC]

There are also a few leveraged broad-based commodity ETFs, including PowerShares DB Commodity Double Long ETN [NYSE: DYY] and ProShares Ultra DJ-AIG Commodity ETF [NYSE: UCD], which offer double the gains or losses.

Before investing in any of the commodity ETFs or ETNs, there are a few things you should know.

What to Look Out for When Investing in Commodity ETFs and ETNs

Broad-based commodity ETFs that use futures contracts usually have uninvested cash. Issuers generally put this money into interest-bearing government bonds. The interest on the bonds is used to cover the expenses of the ETF and to pay dividends to the holders.

Commodity ETNs (exchange-traded notes) are non-interest-paying debt instruments whose prices each fluctuate with an underlying commodities index. It's important to note ETNs are subject to the solvency of the issuer because they are debt obligations.

There are also dramatic differences in the structures of ETFs and ETNs, leading to potential differences in performance and tax treatment. This is something investors should look out for.

In contrast to stocks and bonds, commodities are not income generating. So ownership of commodities, even via ETFs or ETNs, is a pure bet on prices. The expenses charged by the ETF and ETN providers, and those in the cost of storing hard assets or trading futures, eat away at the underlying value of the fund.

Before the global recession hit, the industrialization of BRIC (Brazil, Russia, India, and China) and other fast-growing nations was boosting demand for commodities and driving up prices. Commodity prices have generally declined over the past several months as fears of sluggish economic growth gripped the globe. However, with new signs of world economic stabilization, commodities are starting to come back into the limelight. Investing in commodity ETFs and ETNs is a great way to take advantage of broad moves in the sector.

Good Investing,

Luke Burgess
Editor, Gold World
Investment Director, Hard Money Millionaire

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