Investing in Commodities Funds

Just a few exchange-traded funds and notes provide access to this tricky market.

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Looking for an easy way to get in on the grain boom? In the ever expanding world of mutual funds and exchange-traded funds, there are surprisingly few funds geared specifically toward cashing in on those highly profitable amber waves.

Here's the short list:

You can capture the performance of the agricultural sector by investing in PowerShares DB Agriculture, an exchange-traded fund that invests in futures contracts of four widely tracked commodities. The fund, which is based on the Deutsche Bank Liquid Commodity Index, is almost evenly divided among corn, wheat, soybeans, and sugar. Annual expenses are 0.75 percent.

Exchange-traded notes also provide exposure to commodity futures. Like ETFs, ETNs mimic the performance of an index and trade on exchanges. But instead of holding a portfolio of stocks or futures contracts, ETNs are essentially bonds that promise to repay the amount of your investment plus the return of the index, minus a management fee. The following ETNs all charge 0.75 percent in annual expenses:

The Elements Rogers International Commodity Agriculture tracks an agricultural commodity index created by veteran commodity investor Jim Rogers. The index offers broad exposure to 20 commodity futures contracts, and it includes cotton, cocoa, and orange juice.

Bullish on grain commodities? Soybeans, wheat, and corn make up iPath Dow Jones-AIG Grains.

Intrepid investors looking for bigger risks can play in commodities markets directly by buying grain options and futures. To invest there, you'll need a broker or "futures commission merchant." Once you set up an account, you'll be able to buy options or futures for the usual range of commodities.

Since 2003, the Chicago Mercantile Exchange has offered minicontracts on wheat, corn, and soybeans that are a fifth the size of traditional contracts. For example, you can buy into a corn contract for margins as low as $216 based on the CME rates, though your broker will probably charge you more. The only difference between the smaller contracts and regular ones is the size. The complexity, uncertainty, and risks are unchanged.

As such, commodities futures and options generally remain the realm of professional traders. Tim Hannagan, a grains expert at Alaron Trading in Chicago, advises any small investor to find a broker with top-notch access to research and good educational services.

Even so, unsophisticated investors are still at a big disadvantage. Vic Lespinasse, an longtime analyst at the Illinois Grain division of Cytrade Financial, warns that direct investing is for most "a sink or swim kind of situation." Like most experts, he recommends funds over direct investments for most folks, but if you've got the stomach there are always ways to trade.

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  • Kirk Shinkle

    Kirk Shinkle is a senior editor for U.S. News Money and manages the Best Funds portal. Follow him on Twitter @KirkS or email him at kshinkle@usnews.com.