Although commodities are often overlooked by many investors, these natural resources are considered by many to be good diversifiers in a portfolio. This has been particularly important as of late as many global markets have seen correlation levels soar with even emerging markets moving in lockstep with developed nations like the U.S.
However, not all commodities are by any means the same as the risk and return profile for these products vary greatly across the various types. This means that investors need to zero in on a specific sector or commodity in order to obtain the best possible returns in the space (see The Three Biggest Mistakes of ETF Investing).
After all, in the trailing one year period, performances were vastly different across the various commodities. Several—like those in the grains market—soared by double digits, while others—especially those in the base metal and agricultural markets—saw performances that declined by double digits.
Clearly with this backdrop, picking the correct commodity sector is key to investor returns in this relatively uncorrelated space. Unfortunately, commodities can be extremely volatile so it can help to take some advice on the subject from some of the key market participants.
One way to do this is by looking at recent commodity price forecasts by some of the leading investment houses out there. Fortunately for us, Morgan Stanley (MS) has just released its latest Commodity Manual with price targets for 14 different commodities (read Buy The Ultimate Commodity with These Water ETFs).
Below, we highlight five ETF plays for some of their bullish calls for this year for investors seeking to follow Morgan Stanley into some commodities which could be in line for a solid 2013:
Continued global central bank easing is the main reason for Morgan Stanley’s bullish prediction for gold this year. More of these programs could help to boost gold prices, while an expansion of Japan’s easing could also act as a catalyst.
However, they did note that gold sales are at a low level when compared to the past few years. Due to this, the bullishness could have a cap, at least until more buying takes place.
Gold ETFs are quite abundant for investors, as there are a few choices. The most popular are GLD and IAU, while ETF Securities also has regional gold picks (Asian) AGOL, and Swiss (SGOL). Futures are represented too, with DGL and UBG being options for investors seeking to take this route (read Gold ETFs: Is the Sell-Off Overdone?).
The bullishness for platinum is largely driven by supply concerns stemming from South African production. The country has seen a number of strikes across the landscape, crushing any surplus that was in the market.
Due to this, prices are expected to rise as demand continues to hold firm. This has been led by strong industrial demand—and a booming auto market—so this could be a new trend in the space during 2013.
For ETFs to invest in platinum, investors have a few options. There are two futures-based choices—PTM and PGM—while there is also a physically backed choice, PPLT. The ETF Securities Physically Backed fund is the newest, but it is also the cheapest way to play the space.
The only agricultural commodity on the list, cotton could be a strong performer this year thanks to China. According to the report, China is beginning to lockup the market with at least half the global stocks in its possession (see Buy American with These Three Commodity ETFs).
Furthermore, with grains at elevated levels, some are predicting that cotton supplies might fall a bit this year as well. If supplies decrease and demand remains firm, it could be a solid year for the fluffy commodity in 2013.
Currently, there are two futures-based ways to play cotton, both coming to us from iPath, BAL and CTNN. BAL is the older and cheaper ETN, although it offers less in contango protection—but better volume—than CTNN.
Morgan Stanley’s commodity team is looking for silver to outperform its yellow cousin over the course of the year. Much like gold, the profile is driven by money printing, but the supply/demand picture is also favorable for this often volatile metal.
To play this metal in ETF form, investors have a couple options. The iShares Silver Trust (SLV) is easily the most popular and the oldest, while ETF Securities Physical Silver Trust (SIVR) is the cheapest.
Both of these target the metal in physical form, holding it in secure vaults. Meanwhile, there are also some futures options as well, including USV for an ETN structure and then DBS for an ETF from PowerShares (read Is the Silver ETF Showing Technical Weakness?).
Broad Precious Metals
Clearly, Morgan Stanley is expecting good things out of the precious metals market this year, pretty much across the board. So it may not be a bad idea to invest in the whole space with a single ETF.
One way to easily do this is via ETF Securities’ Physical Precious Metal basket Shares (GLTR). This fund charges investors 60 basis points a year but holds all four of the precious metals in physical form.
The ETF is skewed towards gold (52%), and then silver (36%), while platinum and palladium account for the rest. Still, the fund is pretty much the only way to gain basket, physical exposure to all four in ETF form and as such could be a great pick for investors seeking a broad precious metals play in 2013.
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Author is long IAU, gold & silver bullion.