Commodities have gone from being an afterthought for all but the most sophisticated of investors to a favorite of coffee-machine conversation. In response to all the speculative fervor over commodities, exchange-traded funds have popped up faster than McMansions did during the housing boom.
Yet although commodity ETFs don't look like those pictures of decaying unsold homes in the middle of the California desert, they are showing some signs that they're at least ready to take a break in the long bull market for the asset class -- and at worst, behavior in the ETF market could prove to be a predictor of a long-awaited reversal for commodity prices.
A matter of supply and demand
One of the appeals of commodity investing is that commodities are simple to value. You don't have to go through long, detailed analyses of intrinsic value or try to guess how much a company will earn 10 years from now. Rather, at its most basic level, the best measure of a commodity's value is simply what market participants are willing to buy and sell it for.
For a long time, ascertaining commodity values took knowledge of an arcane corner of the financial markets: the futures exchanges. Although many discount brokers now give customers access to futures markets even with traditional brokerage accounts, it used to take a separate relationship with a specialized futures broker to gain access to the commodities markets.
Now, though, measuring demand for a particular commodity has never been simpler. With ETFs, you can see exactly how many shares investors own on any given day. And by looking at historical data, you can see how money flows in and out of particular commodities over time -- and potentially draw money-making inferences from your observations.
Getting out
Lately, the mood among commodity ETF investors has been anything but calm. When you look at share data for popular ETFs, you can see the competing forces that have buffeted the sector in recent months.
Perhaps most obviously, precious metals have seen many investors exit as prices stopped moving straight up. In mid-April, the SPDR S&P Gold ETF
Interestingly, that trend isn't as clear when you look at leveraged precious metals funds. For instance, with ProShares UltraShort Silver
However, the outflow phenomenon goes beyond precious metals as well. After a big ramp-up in interest in February, the United States Natural Gas Fund
Keep your balance
The important thing investors have to remember about commodities is that their prices tend to move in cycles. When they're in favor, commodities can see their prices move upward sharply. But they can plummet just as quickly when the tide shifts. A crash in commodity prices may not be inevitable, but many investors are clearly content with the profits they've already made in the asset class over recent years and are adjusting their portfolios accordingly. You should consider doing the same thing.
There's more to the world of ETFs than just commodities. Take a look at three ETFs we've discovered at The Motley Fool that we think are pretty promising. Sign up here for our free special report to learn more.
