Riding The Rally In Natural Resources

Investors have suffered a double dose of bad news this year. As the U.S. economy slows under the weight of the weakened housing market, a strong rally in major commodity markets, especially oil, is setting off alarm bells portending stronger inflation.

What’s an investor to do? With the stock market unusually volatile and the prospect of stronger inflation making bonds less attractive, many investors are looking into commodities, where prices have risen strongly in 2008. In years past, investing in commodities meant opening a trading account and wading into the crude oil or corn markets with the big boys, but today, the same, direct exposure to commodities can be gained as easily as purchasing shares in Microsoft or General Electric thanks to mutual funds and a new breed of exchange-traded funds (ETFs).

“They offer investors a new way to play commodities and there are various exposures that an investor could seek,” says Phil Murphy, director of global research and design for Standard & Poor’s Index and Portfolio Services. “There’s been more targeted exposure, and some esoteric exposure, that you can gain through ETFs. If you have a view that inflation is heating up, and furthermore that inflation is going to be led by agriculture, there are various ETFs that you can use to gain pure agriculture exposure.”