Is Death Of Commodity ETFs Greatly Exaggerated?

Commodity exchange traded funds (ETFs) may not be in such bad shape - despite July being the worst month in 28 years, in which they lost 10%.

As this slide continues, an article from The Economist explains that there are reasons to not expect a collapse in raw material prices. There are various explanations for the recent drop in prices, mainly surrounding the dismal economic outlook in wealthy countries.

The slowdown in the wealthier countries leaves them likely to consume less oil, steel, cocoa and many other commodities. However, emerging markets are expected to make up for this slowdown in consumption.

Emerging markets, led by China, now account for the bulk of growth in global demand for raw materials and a good chunk of overall consumption. On top of this, the International Monetary Fund predicts developing countries to grow nearly 7% this year, which should make up for the slowdown of wealthy countries and keep demand for most commodities expanding.

Other factors influencing commodity prices include a number of different circumstances. Some see commodities in general, particularly gold, as a hedge against inflation. These type of investors may sell if their fears about rising prices subside. Also, other investors may sell to cover losses in other markets, or to rebalance portfolios in light of many different factors ranging from falling stock and bond prices to avoiding the repurcussions of American politicians looking to crack down on speculation.

Commodities have also shown a trend to move in the opposite direction of the dollar, which has been climbing recently. However, it seems that as long as economic growth in the developing world continues, there are no true reasons to expect a collapse in raw material prices.

Some commodity ETFs include:

• iShares S&P GSCI Commodity-Indexed Trust (GSG), up 13.8% year-to-date
• GreenHaven Continous Commodity Index (GCC), up 4.1% since January 24th inception
• iPath Dow Jones-AIG Commodity Idx TR ETN (DJP), up 3.5% year-to-date

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