Commodity ETFs Commodity ETFs: The ETFs are Coming
by Justice Litle
The Rude Awakening
Wall Street, New York
Friday, March 31, 2006 Justice Litle writes about a few Commodity ETFs. ------------------------- - Stash some bullion under your floorboards – investing
in gold is not a filthy habit anymore!
- ETFs charge down Wall Street – how you can ride them
to the bank,
- Eric offends a "wander" outside the unofficial Rude
HQ, all the markets and much more...
------------------------- Eric Fry, reporting from Westchester County... On a recent night, your editor and several colleagues from
Baltimore headquarters, convened at Sugarcane, our
unofficial New York headquarters. After a couple of
mojitos, our crew ventured out of the bar toward Michael
Jordon's steakhouse in Grand Central Station. En route, an
inebriated "wanderer" gathered himself in front of us and
blurted out, "Hey, y'got a cigarette?" "No, sorry," came the reply. "Oh alright," said the wanderer, swaying from side to side,
"What do all you guys do anyway?" "We write," your editor replied. "What do you write?" "Um...pornography," we answered, thinking this reply might
end the conversation. "Oh yeah?...That's cool!" the wanderer exclaimed. "What
kind of pornography? "All different kinds, we..." "He's kidding," a member of our group interrupted. "We
write about finance...y'know, stocks and bonds." "Aw that sucks!" the wanderer hissed with disgust. He waved
his arm as he turned to leave and growled, "I can't deal
with that kind of sh**!" This bizarre exchange outside Sugarcane reminded your
editor of the gold market. For the better part of the last
25 years, commodities in general – and gold in particular –
resembled a kind of financial porno. No one would dare to
mention gold stocks in polite company. A few twisted
individuals might stash a few gold coins under their beds,
but they would never admit to doing so. They would simply
indulge their shameful fetish privately. In 2001, your editor overheard the following remark from
one the attendees at a Grant's investment conference:
"...The other night a cocktail party, after I mentioned
that I was buying gold stocks, the other guests shunned me
all evening. It was as if I had just told them that I was a
child molester..." But the world is changing rapidly. Gold has stepped out of
the shadows of shame into the limelight of renewed
respectability, as illustrated by the growing popularity of
the gold ETFs (NYSE: GLD). But this gold ETF is merely the
first of a new generation of innovative, resource-focused
ETFs. In the column below, Justice Litle flashes a peek
into this once-and-former financial porn.
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-------------------------
The ETFs are Coming!
By Justice Litle If Paul Revere were living today, and if he were a
passionate investor, he might well ride through the
corridors of Wall Street, shouting: "The ETFs are Coming!
The ETFs are Coming!" Many ETFs (exchange traded funds) have arrived already, of
course, but a new wave is on the way. A silver ETF sponsored by Barclay's Global Investors is not
yet a fait accompli, but it moves closer every day to
joining the short list commodity-based ETFs. Anticipation
of the new silver ETF has pushed silver prices to multi-
decade highs. The supply/demand situation for silver is potentially
explosive, as we outlined in our "Silver Moon Rising" issue
of Outstanding Investments some months ago. But it should
be mentioned that not all silver bulls are sanguine about
the ETF situation. Some are wary of "too much of a good
thing." In other words, if investor demand is too strong
relative to the limited supply of silver, we could see the
ETF structure tested to its limits, and potentially pushed
to the breaking point. Will Barclay's and the market makers
be able to maintain an orderly market in the event of a
silver bull stampede? We may well find out. Commodity ETFs: Crude Oil ETF The second ETF, long anticipated and long delayed, gives
investors direct exposure to arguably the most important
commodity in the world: crude oil. The American Stock
Exchange plans to launch the new crude oil ETF, (AMEX:
USO), next week, pending a routine stamp of approval from
the SEC. What does this mean? For one thing, some investors will
soon seek exposure to crude oil directly, rather than
trading energy stocks as a proxy. Does this make investing
in energy stocks obsolete? Not at all. It simply enables
investors to go straight to the source, if they wish.
Because energy stocks are so correlated to the price of
crude, USO could also prove its worth as a hedging vehicle
for the energy-related portion of one's portfolio. Side note: I stepped into the financial world as a
commodity broker, and spent the first 3 years of my career
working with commercial hedgers, as well as commodity
speculators. So it was natural for me to wonder, when I
first heard the idea of commodity ETFs being floated: "why
don't investors just go straight to the futures markets,
which have been here all this time? They get more
available leverage and better tax treatment that way. So
why mess about with an ETF that is simply a futures stand-
in, a proxy for the real thing?" (The new crude ETF will
be managed behind the scenes via futures and options, as is
the Deutsche Bank commodity offering (AMEX: DBC). Sign Up for The Rude Awakening Start your mornings off with a dose of Rude news. The Rude Awakening is dedicated to highlighting phenomena in the financial markets that others may not see. Let the Wall Street Journal and the New York Times "break news." Sign up FREE Today! We will not share your email address with anyone else, period.
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Commodity ETFs: Mundane, but Powerful The answer to why commodity ETFs like USO are needed is
mundane, but powerful. The mundane part is this: commodity ETFs expand investor
participation in commodities dramatically because ETFs are
perceived as "safer" than the underlying futures markets
they mirror; ETFs are also wholly accessible from plain
vanilla stock accounts. This is why the Street Tracks Gold
ETF (GLD: NYSE) has become so popular. Gold futures were
always available - able to achieve the same purpose as GLD.
But futures markets are not accessible to the average
investor. Futures are generally considered too "exotic" -
and frequently too unwieldy in terms of contract size -
whereas ETFs are more granular (one can buy a few shares at
a time), and more familiar. Many institutions are more comfortable with ETFs too. Some
of these blue-chip pension fund managers would no sooner
trade futures than take their grandmother to a Marilyn
Manson concert. But an ETF that gives them exposure to an
important asset class (commodities) without the taint of
speculation? Well, that is a concept they can work with.
Such a proposition is more 'respectable,' flying under the
radar of that "unacceptable speculation" label that futures
have been tagged with. The net result here is
that many monolithic institutions-of the type that run tens
of billions or even hundreds of billions-will have another
avenue into the commodity markets. The last ETF of note, which we will only touch on briefly,
is the Euro Currency Trust (NYSE: FXE). As its name
implies, FXE is a sort of proxy for going long (or short)
the Euro vs. the dollar. FXE is fascinating to me because
the very introduction of a currency ETF represents a
paradigm shift. In terms of equities, and in terms of
trading and investing in general, we are clearly moving
away from a US-centric world and towards a global-centric
world. Opportunities are no longer confined to one country,
and they are no longer "long-only." We are slowly
witnessing a rise in sophistication and a rise in
understanding that non-equity investment classes are
important. Commodity bulls have never before enjoyed so many different
ways to express their bullishness...or to hedge against it.
[Joel's Note: If you have recently returned from a week
vacation to the outer reaches of the galaxy, you may not be
aware that some serious moves have been underway in the
commodities markets. As Eric mentioned just two days ago,
gold, silver, palladium and copper are all enjoying highs
not seen in at least 22 years. Now Justice has discovered a
way that you can cash in on this raging bull by snagging
some bullion to stuff under your own floorboards. Learn 5
new ways to invest in gold right here: Bullion at 90% off -
http://www.isecureonline.com/Reports/OST/EOSTG418
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