Chartwell Asia ETF
Article Overview
Chartwell Asia zeros in on an under the radar screen investment theme and then lays out several creative options to capitalize on it.
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Wednesday, February 22nd, 2006
Riding the Commodity Bull
Crude oil prices are staying above $60, gold hit its highest level since 1981, silver has climbed to a 17 year high, and copper and zinc have also reached new record highs. It seems like 2006 is another leg in the long-term commodity bull run. What is driving this trend and how what is the best way for the individual investor without the time or inclination to follow the intricacies of these markets?
Higher demand from fast-growing emerging markets such as China is a major factor as well as the speculation that some central banks may diversify away for the US Dollar to precious metals. The explosion of new commodity investment vehicles and the perception of commodities as an inflation hedge like in some previous cycles may also be driving demand.
Global political uncertainties are certainly priced into markets. The situation in Iran, the fourth-largest crude producer in the world, is just one of what may have markets on edge and leaning forward.
Whether as a way to invest in global growth or a hedge on inflation and political uncertainties, it makes an awful lot of sense to diversify your global portfolio with an allocation to commodities.
Not being correlated to stocks or bonds, commodity exposure also serves as a portfolio buffer to reduce overall portfolio risk and increases the chances of achieving greater returns.
But deciding on the best vehicle to gain commodity exposure can be a daunting task. Managed future funds have high minimums, commissions and fees and the use of leverage can lead to unexpected volatility.
Here are a few simple ways to gain commodity exposure without the high costs or betting on one commodity.
First, take a look at AngloAmerican (AAUK), a huge conglomerate and leading natural resources and mining company that has significant exposure to commodities. It owns 45% of DeBeers which, in turn, is the largest producer and marketer of gem diamonds in the world. It seems logical that rising disposable incomes and wealth in India and China will lead to commensurate higher demand for precious gems in both countries. According to the Diamond Registry in New York, the growth rate in China is about 20 percent a year compared to 6 percent in America. DeBeers also plans to open outlets in 17 mainland cities as part of a $16 million marketing campaign.
AngloAmerican also accounts for 38% of the global supply of platinum and has exposure to copper nickel and zinc not to mention significant coal production.
Next, consider the first exchange-traded fund (ETF) to track a commodity index. The Deutsche Bank Commodity Index ETF (DBC) started trading just last Friday on the AMEX with an expense ratio of only 0.95%. The ETF gives investors exposure to a basket of the most liquid and deep commodity markets in the world. The current weightings are: 35%, light, sweet crude oil, 20% heating oil, 12.5% aluminum, 11.25% corn, 11.25% wheat and 10% gold.
Another good option is the country-specific iShares that have sizable exposure to commodity markets such as Australia (EWA), Canada (EWC), and South Africa (EZA). The Australia iShare has 28% exposure to the materials and energy sector including an 11% exposure to the largest mining company in the world BHP Billiton (BHP). There are also on the market several ETF gold options and iShares is reportedly seeking SEC approval for an ETF tracking silver prices.
And don't forget next to oil the world's second largest commodity, coffee. Asia's, and in particular China's, rising disposable incomes plus an acquired taste for coffee could spur consumption leading to explosive demand. If China gets to South Korea's or Taiwan's per capita coffee consumption levels, it could literally purchase total current world coffee production.
Since it takes about 4-5 years for a coffee tree to bear cherries, investing on the production side is not for the faint of heart due to hard to predict coffee price fluctuations. The most attractive option may be to invest in the retail coffee market which is highly fragmented. Starbucks (SBUX) is the global leader with 10,500 retail outlets of which 3,500 are outside North America.
Starbucks began in Asia with its first store in Japan in 1996 and now has 165 stores in mainland China, 221 in Hong Kong, Taiwan and Macau, 595 in Japan, 64 in Australia and 34 in Singapore. Its global goal is to reach 30,000 outlets with half of them located overseas. China could very well become its second largest market after America.
Don't get carried away with commodities but blend some of these commodity options into your global portfolio for real diversification.
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