Trade Commodity via ETFs listed on AMEX

With the recent lows of Crude Oil and highs of Gold prices, and with recent spate of inappropriate corporate governance leading to total erosion of stock prices, it may be interesting to look at commodity ETFs listed on AMEX, especially when we have limited access to buying Futures, and if you fear of the expiration period of the Futures.

There are tons of ETFs listed on AMEX, and trading is very active, unlike those listed on SGX, which is pretty premature and trading volumes are low. I have put up 3 ETFs live prices on my site, namely United States Oil Fund, PowerShares DB Crude Oil Double Long ETN and SPDR Gold.

All these funds seeks capital appreciation and tracks Crude Oil and Gold prices pretty closely. With prediction that Crude Oil prices being on the uptrend on a long term basis, these ETFs provides the chance to be invested in these commodity, yet without the worries that prices will not appreciate to your expected level before expiration like in Futures.

However one thing to note is ETFs that trade oil futures, which allow investors to lock in the cost of oil they plan to buy later, face unique challenges. During bullish times, when oil prices are expected to rise, funds can end up paying contract prices that are higher than spot prices, a situation called "contango." Each time an oil ETF rolls contracts forward a month during periods of contango its return is eroded.

Generic crude oil contracts for May 2009 are trading at $48.46 a barrel on the New York Mercantile Exchange. The price rises to $55.04 for October 2009 contracts and $60.20 for May 2010 contracts. Each time an oil ETF rolls contracts forward a month, its return is eroded.

Thus there still exists a risk that ETF prices may not track commodity prices as closely as it is expected.

INVESTORS SHOULD NOTE: There are two types of ETFs -- those backed by physical commodities in storage, such as the largest precious-metals ETFs, and those that aren't, says Maister. With GLD, investors buy shares that track gold, minus 0.40% for expenses: "They buy physical gold, stick it in a vault and charge you 40 basis points a year. The 40 basis points is the only tracking error."

It's harder to store oil and grains indefinitely. So ETFs that include these commodities access the market through futures contracts, say Maister and Burns. But this means more potential for a tracking error, adds Maister. ETFs utilizing futures are likely to show greater deviations from changes in spot prices.

Sen notes that even if oil goes up, investors can lose out periodically, when nearby futures are more expensive than the next month out. An ETF may have to sell the front month at a lower price than it pays for the next during rollover. The plus of such ETFs is that they let those with less capital invest in oil without going it alone in futures, and without the worry of stock-picking the wrong name.