Welcome to the ETF Prime Podcast

Inside Commodities Conference

I had the opportunity to attend the Inside Commodities conference at the New York Stock Exchange last month.  The conference featured a Who’s Who of bigwigs from different corners of the commodities industry.  I wish anyone who doubts that commodities belong in everyone’s long-term portfolio could have been there.

The highlight of the conference was a keynote speech by Jim Rogers, of Investment Biker fame (check out Jim’s blog for yourself). Jim presents a compelling case for buying commodities.  Some highlights from his presentations:

• Economically, the 21st Century belongs to China (Jim is having his daughter learn Mandarin Chinese) similar to the way the 20th Century belonged to the United States.
• He doesn’t agree with the Federal Reserve’s handling of the financial crisis, claiming that the inflationary impact of their efforts to avoid deflation will have negative consequences for our economy for a very long time. He believes we will experience a gigantic shift away from paper assets into real ones.
• Jim claims that commodities are the second largest asset class in the world, but that most people don’t know how to use commodities to protect themselves. According to Jim, there are tens of thousands of mutual funds an investor can choose from, but fewer than 100 that invest in commodities. He’s sure people will learn about commodities soon, though, similar to the way most people who couldn’t spell the term ‘mutual fund’ forty years ago have embraced them since.
• Bull markets in commodities historically last 18-20 years, so he is guessing it will be time to get out of commodities around 2020. The current drop in commodities prices doesn’t count as a bear market to Jim. He says we are undergoing an asset liquidation that has only happened eight or nine times in the last 150 years – the current one resulting from massive hedge fund deleveraging
• Many commodities face an unrelenting increase in demand as developing countries industrialize while we face a depletion of our natural resources. For example, in emerging economies, people want more protein in their diet as their per capita income grows. A small increase across millions of people puts an enormous stress on the world’s ability to produce the grains, livestock, etc. needed to meet that demand.

Anyone interested in learning more about Jim should check out his blog.  I would also pick up his book “Hot Commodities”, which is a quick read and explains in depth his investment thesis for each class of commodities.

Mutual Fund Tax Pain

One of the biggest benefits ETFs provide investors is they can cut your tax bill.  Because of their legal structure and minimal trading, ETFs typically distribute very little, if any, capital gains to investors.  As The Motley Fool explains, the same is not true for mutual funds.  Adding salt to the wound this year:  some investors are going to be paying heavy taxes on capital gains – – even though their funds might be down 40%!

So, what can you do to protect yourself?  If you must buy a mutual fund, wait until after the fund pays out its capital gains before you buy.  You can generally check with the mutual fund provider website to find that date.

If you already own a fund and it hasn’t yet paid its capital gains distribution, you can avoid the distribution and still retain much of the performance of the fund by selling the fund and buying a highly correlated ETF at the same time.

One place to start your search for a suitable ETF replacement is at the free correlation calculator here. Click on the field ‘correlation cloud’, then type in your mutual fund ticker along with a few ETFs that you think might be a good match (you need 5 tickers to run the program).  Any result in the high 90’s means the ETF is likely a candidate for replacement for your fund.