Playing the commodities boom like the pros using ETFs

Posted Jan 7th 2008 1:22PM by Zack Miller
Filed under: International Markets, Commodities, Oil, Agriculture

In case you were too busy watching Obama win in Iowa or voyeuring in on Britney's travails, we're in the midst of what some pundits call a "supercycle" of a commodities bull market.

For more on this supercycle, I recommend reading uber-trader Jim Rogers' work on commodities. Jim was, along with George Soros, the founder of the Quantum Fund. He has been pretty accurate with his predictions regarding hard assets and the ensuing demand/supply issues that are being exacerbated by demand from India and China. There's an insightful interview with him here that's really good reading.

From the interview: "Nobody has discovered a gigantic oil field for thirty years. That's not a theory; that's a basic fact. In the meantime, demand for oil has been going up for many years. That's not a theory, either; that's a simple fact. Likewise, there has been one lead mine open in the world for the past twenty years, and the last lead smelter was built in the U.S. in 1979. I could continue: the number of acres devoted to wheat farming has been declining for 20 years.

"Those are simple facts that lead me -- and, I think, any rational person -- to conclude that we're in a bull market for commodities that has a ways to go."

So, how does an ETF investor play what's going on around the world in commodities?

Investing in Jim Rogers

Most people don't know that in 1998 Rogers created an index to track commodities. The Rogers International Commodity Index (RICI) is one of the best performing indices to play the commodities game. The index uses futures contracts on 36 exchange-tradable commodities.

The RICI also tracks one of the most diverse baskets of commodities. Who knew exposure to soybean meal and greasy wool actually lifts performance? The RICI index has outperformed the DJ-AIG Commodity Index handily over the past five years, delivering 21.63% compound returns against 15.19% for the better-known DJ-AIG

Until recently, this index was just that -- an index that tracked commodities. Late last year, the ELEMENTS consortium launched an ETN (similar to an ETF, an ETN is actually a debt security that trades like a stock) called the Rogers International Commodity Index (AMEX: RJI).

ELEMENTS also launched three sub-indices based on Rogers' RICI: the Agriculture (AMEX: RJA), Energy (AMEX: RJN) and Metals (AMEX: RJZ). I personally like the RJI because of its breadth -- I don't have enough insight into which sub-index will outperform the other.

So, if you're looking for exposure for a smart way to play the commodities boom, check out Jim Rogers' indices and the new ETFs.

You can see the prospectus for the ELEMENTS ETNs here.

Zack Miller the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Author does not own any stocks mentioned.

Tags: commodity, index, jim rogers, JimRogers, RICI, rja, RJI, rjn, rjz, Rogers International Commodity Index, RogersInternationalCommodityIndex