Advisor’s Corner
By Rich White

All indexes aren't rocket science. In fact, just about anything can be an index—even a box of sugar or a leather shoe.

Maybe that's stretching it. But an important index that became accessible to investors in 2006 wasn't too different. It was a common barrel of crude oil.

Actually, a barrel of oil has been the most visible index of global energy economics for some time. In April of 2006, the barrel became investable via a tracking exchange-traded fund. Why was this important?

Oil is the king of all commodities, capable of sparking wars, moving markets and causing Fed members to squirm in their chairs. And the growth of commodities ETFs holds opportunities for financial advisors to expand and enhance investment strategies.

Should advisors consider introducing commodities ETFs to clients now? For investors with moderate- to-aggressive risk profiles, the answer is affirmative for three reasons.

The Case For Commodities ETFs
First, commodities are the best pure inflation hedge available to most investors—even better than real estate, because they reflect global (not local) economics.

Second, selected commodities now have 10-year performance records comparable to equities, with low correlation to equities. Traditionally, the ups and down in commodities prices have "reverted to the mean" of price inflation. In other words, you could count on commodities to deliver long-term returns roughly equal to the rate of inflation.

But that thinking has changed in specific commodities due to the sustained demand growth of developing economies such as India and China, matched against the finite nature of natural resources. The combination of high historic returns and low correlation with equities makes commodities attractive for diversified investment strategies based on "efficient frontiers."

The third reason to own commodities, and perhaps the least intuitive to some investors, is the complexity and militancy of today's world, combined with investors' need for portfolio insurance. During times of economic pessimism, investors realize the limits of paper assets such as currencies, bonds and stocks. You can't eat them, wear them or use them for fuel. Conversely, commodities become more valuable during tough times because they have tangible value that rises when confidence in paper sinks.

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