Commodities Futures: A New Way To Play for Private Investors

On Wednesday I said that I was sceptical regarding new diamond futures contracts, so today I would like to talk about some new derivative products that I believe will be a stunning success.

Exchange traded funds (ETFs) have been around since December 2003 – and they are getting more and more sophisticated. ETF Securities is launching a range of new funds in the next few weeks that will give you access to ten baskets of commodity futures prices that are linked to the Dow Jones-AIG Commodity Three-Month Forward Indices. You can now easily play the commodities futures curve.

This makes it much easier for private investors to gain access to these futures markets. Indeed, it is possible to short these funds and profit from backwardisation, should you think the price is going to fall.

The ETFS Forward Index Commodity Securities, as they are known, are a secured note that can be created or redeemed on demand by market makers. They trade on the LSE just like a normal equity and are priced just like a normal ETF.

The ten different type of security track the following:

All commodities
Energy
Petroleum
Commodities ex-energy
Precious metals
Industrial metals
Agriculture
Softs
Livestock
Grains

Please note that I do not have a business relationship with ETF Securities and I am not recommending buying or shorting any of these new instruments – I just thought that you should be aware of their imminent launch. They are exciting new products.

I believe that they will prompt significant investor interest. I will be watching them closely and deciding which, if any, to include in the portfolio of my newsletter Outstanding Investments.

The instruments are linked to the Dow Jones-AIG Commodity Index. Within this index, no related group of commodities, such as energy, precious metals livestock or grains, can constitute more than 33%. No single commodity can constitute less than 2% of the industry.

The commodity index is composed of futures contracts on 19 physical commodities and was launched in 1998. At the end of June, there was about $38 billion invested in financial products tracking the index. The three-month forward version of the index was launched last week in conjunction with the ETF products.

So, forget diamond futures, these new and easily accessible ways to play the commodity sector look like a far better bet.