Hard assets have traditionally been a great way to diversify a portfolio and protect against inflation and overall market turmoil. When considering hard assets, many think of precious metals such as gold and silver, however, there is a wide array of choices that can be easily accessed in a cost-efficient manner through exchange traded funds. As an alternative to the more pure exposure provided through ownership of physical commodities or through futures contracts, ETFs also provide alternative, indirect access via the stocks of companies participating in the production, processing and distribution of commodities. Exposure can also be accessed via exchange traded notes (ETNs) – debt instruments that commit to deliver the total return of a commodity index.
Examples of equity-based ETFs covering companies that participate in the production and handling of commodities are SPDR S&P Metals & Mining (XME) or the Market Vectors RVE Hard Assets Producers (HAP). XME provides exposure to large companies like US Steel and Alcoa and has an expense ratio of 0.35%. HAP, on the other hand, is a bit more diverse providing exposure to water and renewable energy in addition to metals and mining. It carries an expense ratio of 0.65%.
The ETN alternative can be tapped through the following Barclay’s iPath family of commodity ETNs:
- iPath Dow Jones UBS Industrial Metals Subindex Total Return (JJM)
- iPath Dow Jones AIG Tin Total Return Sub-Index ETN (JJT)
- iPath Dow Jones AIG Platimun ETN Total Return Sub-Index (PG)
- iPath Dow Jones AIG Lead ETN Total Return Sub-Index (LD)
- iPath Dow Jones AIG Aluminum Total Return Sub-Index (JJU).
Note that as unsecured debt instruments, ETNs carry some level of issuer credit risk.
