Exchange Trade Funds
Investing in Exchange Traded Funds
Investors around the country are looking for a safe way to invest their money while the market appears to be more volatile than ever. Interest rates are being cut, inflation is going up, and everyone’s money is worth less. While the stock market is feeling the hit of these negative events, many commodities are seeing record prices. Prices in the precious metals markets as well as the energy sector have become some of the only safe bets for a continued rise. If you haven’t begun already, it’s not too late to get in the game on these profitable resources.
The biggest problem when it comes to investing in either oil or gold is choosing which way to get in. Buying options can be some of the most risky investments you can make. If you were to invest in a single oil company, which one should you choose? Should you invest in a gold mining company, or should you try to hold physical gold? These are all important questions that investors need to ponder if they want to see any profits from their investment.
Luckily, there is now a low-risk and diversified way that investors can put their money in the commodities they think will shoot up without taking on the dangers that are out there. The way to do this is by investing in an Exchange Traded Fund (ETF). More about exchange traded funds in a moment. First, lets see why oil and gold are rising so quickly now and what we can expect in the future.
Oil Exchange Traded Funds
Oil has climbed to a record-high price per barrel. Why is the price rising? The Peak Oil paradigm is beginning to gain traction. Peak Oil is the theory that we are nearing the peak of the oil output the Earth has to offer us. America’s Secretary of Energy and former Director of Central Intelligence James Schlesinger recently noted at an international conference on the subject of energy, “The battle is over, Peak Oil is now accepted as inevitable, and the debate only becomes as to when.”
This is a remarkable statement, coming from one of the most “inside” of U.S. political insiders. One of the long-term trends you can expect to see is that oil prices will remain high. Oil supplies will be precarious and subject to disruption by weather events, natural disasters, and fourth-generation warfare aimed at “systemic disruption.” Also, new discoveries will trail consumption. The global oil industry will extract at least three barrels of oil equivalent for every “new” barrel it finds via discovery of reserve growth.
So looking ahead, oil and natural gas in the ground, as booked reserves or realistic and exploitable resources, is more and more valuable. It also means that oil service companies with a lock on technology and the operational skills to create technological systems for extracting hydrocarbons are also more and more valuable.
Buying gold is as far as you can get from today’s complex and exotic debt markets. They’re making headlines for all the worst reasons today, as banking stocks plunge, mortgage bonds slip into default, and losses pile up at hedge funds.
Gold, on the other hand, is recording near three-decade highs, and it still doesn’t owe anything to anyone. In our current financial marketplace, that makes gold rarer still.
Gold’s lack of “default risk” also sets it apart from the mountain of debt built up by Western consumers and their governments. The big picture?
- The average British household now owes nearly £9,000 (almost $18,000) even before you account for its record mortgage debt
- The U.S. government has run up $9 trillion in debt, much of it owed to fast-growing Asian economies like China and all of it waiting for U.S. taxpayers to make the repayments
- Even in Europe, the single currency Eurozone now faces a housing-debt slump in Ireland and Spain. Italy may have to pull out of the euro. Greece’s high-spending government should have pulled out five years ago.
Compared with this epidemic of debt, very few people own gold. Fewer still own it outright, in their name alone. However, the global derivatives market of financial promises has doubled in three years, to stand above $415 trillion. That’s more than eight times the value of the entire world economy!
Choosing an Exchange Traded Fund
You know that oil and gold is something you want your money tied to, but what’s the best way to do that? That’s where Exchange Traded Funds come in. An ETF is an index fund that is traded everyday in an exchange. They can be bought and sold just as easily as you would normal stock. The appeal of an ETF comes from the diversification afforded to owners.
When you own an ETF, you essentially own a “basket” of securities that lie in one segment of the market. Instead of betting on just one company in the market, you are betting on the performance of the entire index itself. For the kind of ETF that we are dealing with, you wouldn’t own stock in a single oil company, you would own shares of the entire industry. That way, when the price of oil rises, the value of your ETF raises right along with it.
A great example of oil ETFs is Oil Services Holders (OIH). This fund holds shares of companies that are involved in the oil service industry. Some of the companies held in this ETF include:
· Baker Hughes Intl.
· Cameron Intl.
· Diamond Offshore Drilling
· Global Santa Fe Corporation
· Halliburtun Co.
· Noble Corporation
· Schlumberger Ltd.
· Smith International Inc.
· Transocean Inc.
· Weatherford Intl.
An example of a gold ETF is StreetTRACKS Gold Shares. StreetTRACKS is listed on the New York Stock Exchange and is easy to access whenever you want. With an ETF like this one, you can own a piece of the bullion market without having to physically own gold or pinpoint which mining company is the perfect choice to invest in.
Whenever you are attempting to profit from the performance of a commodity, there is plenty of risk and research that usually must be done. ETFs simply minimize the amount of risk you are exposed to and the amount of homework needed to be done. They give you a great way to feel confident about your investment without having to disrupt your life with daily trades.
If you’d like to learn more about the emerging potential with gold and other resource stocks, sign up for our our daily E-Letter Whiskey and Gunpowder.
Jamie Ellis, Whiskey & Gunpowder
Additional Exchange Traded Funds (ETF) Resources:
Exchange Traded Funds – Wikipedia
Exchange Traded Funds Center – Yahoo Finance
ETF Investment Guide -seekingalpha.com ETFs
ETF Connect – ETFconnect.com