Commodities ETFs are OK if you understand the risks
— -- Q: With future inflation in mind: What are some good commodity exchange-traded funds (ETFs) to buy?
A: Just about every investor I speak with these days isn't afraid of the boogeyman. But they're deathly afraid of inflation.
Inflation, a period of rapidly rising prices, can be devastating to savers and investors. Bond investors get especially hammered.
Just imagine if you bought a bond that pays 4% a year interest, but prices of goods and services rise 10% a year. Your real purchasing power is sinking by 6 percentage points a year in that nightmare scenario.
Stocks don't do much better in inflation, as companies choke on higher raw materials costs and consumers cancel non-essential purchases as goods become unaffordable.
So, now that we're agreed that too much inflation is a bad thing, the question becomes what do you do about it? If you think inflation is coming, historically, real estate and commodities have been good defenses. A ton of steel or a barrel of oil will rise in price if inflation hits and protect its owner, or so the theory goes.
Given the level of hysteria over the risk of inflation in some quarters, Wall Street has been eager to give investors all sorts investment choices. There are dozens of commodity mutual funds and exchange traded funds (ETFs) available to investors who want to buy them. Just search on the word "commodity" or the names of specific commodities at Morningstar.com or you can search using USATODAY.com's Stock/Fund/ETF screener here. Select the Equity asset class, then click on the Portfolio Information (General) plus sign. In the Sector Allocation pulldown, choose the type of commodity ETF you want to look at.
I'll leave you, though, with this caution. The fact that so many people are braced for inflation should give you pause. Commodities prices already reflect current inflation expectations, so you could lose money if inflation is lower than people fear.
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