As the world's population balloons rapidly over the next few decades, so will demand for oil, gas, food, and all sorts of infrastructure.
The urbanization and rise of the middle class in emerging markets like China, India, and Brazil will dramatically boost the need for food and facilities. By 2050, almost three quarters of the world's population will live in urban areas (compared to about half today) and food production will need to increase by 70 percent to keep pace with overall population growth, according to projections from the Organisation for Economic Co-operation and Development and the United Nations Food and Agriculture Organization. Although natural resources are notoriously volatile as investments, the long-term outlook appears strong for agricultural commodities like wheat, soybeans, and corn; fossil fuels; and base metals such as copper and lead that are needed to build and maintain homes, highways, and shopping malls.
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Betting on commodities by buying futures contracts directly can be very risky. So having a core position in a fund that invests broadly in commodity-related businesses with some side positions tied specifically to agriculture and energy is probably the smartest move for the retail investor, says James Dailey, whose TEAM Asset Strategy Fund buys a range of stocks, bonds, commodities, and currencies and had returned 7 percent over the past year through late November.
Two broad-based funds that experts like, the PIMCO Commodity Real Return Strategy Fund and the PowerShares DB Commodity Index Tracking ETF, have returned an annualized 1 percent and 2.7 percent, respectively, over the past five years. The Fidelity Select Energy Portfolio specializes in stocks of energy-related companies, particularly those in the oil and gas industries, and the Market Vectors Agribusiness ETF leans more toward agricultural equities. For those who do invest directly in futures, commodities shouldn't account for more than 5 or 10 percent of your allocation, says Carlos Sanchez, director of commodities management with CPM Group, a commodities research and consulting firm.
Water is one natural resource that analysts see as particularly attractive for the long term. In 2010, the World Health Organization reported that about 1 in 8 people worldwide lack access to safe drinking water, and many more are without basic sanitation services. In the next 25 years, as much as $22.6 trillion will be spent on global water and wastewater infrastructure alone, predicts Steve Hoffmann, cofounder and managing director of Palisades Water Index Associates, which has developed several indexes of water-related companies. Some experts anticipate that by 2030, demand could be 40 percent higher than today.
Water isn't traded in futures like oil or natural gas, but as with those resources, there are ways to tap in. Investing in water is largely a "thematic" strategy that can include a diverse variety of companies and sectors, from utilities and infrastructure builders to firms that conduct wastewater treatment or desalination, the process of converting seawater into drinking water by removing salt. So finding the strongest companies and those poised for growth takes some work. Strategists see growth opportunities in national and regional utility companies like Aqua America and California Water Service Co., equipment developers like Milwaukee-based Badger Meter, and water management companies like Pasadena, Calif.-based Tetra Tech.
For average investors, index or exchange-traded funds probably are the easiest way to get exposure. One water fund in existence since 2007 is the Guggenheim S&P Global Water Index ETF, which consists of more than 40 infrastructure builders, water treatment organizations, and utility companies from across the world. The fund is up 10 percent over the past year. Other ETFs, like the Invesco PowerShares Water Resources Fund and the Invesco PowerShares Global Water Fund, both based on Hoffmann's indexes, each hold about 30 companies. Over the past few years, these funds have tracked fairly closely with the S&P 500 Index, and took dips this summer along with the stock market. Index funds include the Calvert Global Water Fund and the PFW Water Fund.
[See U.S. News's Best Fit Global Natural Resources ETFs.]
What about gold as a safeguard against a weakening currency and economy? The price has broken records several times in 2011 and, as of late November, stood at more than $1,700 an ounce. Nobody can predict whether the run will continue, though most of the experts who talked with U.S. News agreed that taking a small position can't hurt.