Commodities - silver, crude oil, bushels of wheat and gold, to name a few - have been sizzling for about a year, with gold now nearing $600 an ounce. However, some mutual funds that track commodity prices are not doing nearly as well, according to The Wall Street Journal.
Over the past year or so, investors have been bearish when it comes to funds like these, because of the global boom in commodities. Rather than trade in the actual goods, these funds track prices through complex financial agreements known as derivatives. But derivatives are thorny, and investors are beginning to see why.
Just last week, Oppenheimer Funds' $1.8 billion Real Asset Fund was forced to close its doors to new money, because of a problem with properly arranging derivatives.
To small investors, investing in commodities has been a problem as well, as it is not practical to keep pork bellies or gold bullion stacked up in their living rooms. Another option is futures, which are very risky and hard to manage.
Morningstar analyst Karen Dolan suggests that mutual fund investors might want to "think twice" before putting their money into these types of mutual funds.
Investors have been flocking to commodities because they move separately from stocks and bonds, helping to smooth out a portfolio's ups and downs, the Journal reported.
Mutual funds are a good vehicle for owning stocks and bonds; however, the tax rules, which govern funds, make it difficult to design a fund that can invest in commodities easily.
Exchange-traded funds have blossomed this year and that could be a result of the commodities dilemma. Because of the way that they are structured, ETFs can invest a lot in futures contracts, and can even directly invest in commodities.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.