Commodities Funds Gain Steam

Fund firms are joining exchange-traded fund providers in the fray, with launches from Direxion Funds and Morgan Stanley Investment Management. ProFunds has filed for a suite of commodities ETFs it plans to launch in August. So far, 25 commodities ETFs have launched this year, according to Matt Hougan, editor of IndexUniverse.

Commodities funds have experienced $103 million in net flows the past three months and $480 million year-to-date. Investors pulled $1.85 billion from commodities funds in 2007, according to figures from Morningstar. "We have seen a proliferation of these funds. There has been a lot more investor interest and assets flooding into commodities and you see a rush by players to offer a competing product," said Karen Dolan, director of fund analysis at Morningstar.

Direxion Funds last week launched the first long/short commodities fund, the Commodities Trend Strategy Fund, benchmarked to the S&P Commodity Trends Indicator. Direxion has also filed to launch a commodity bear fund, but has no timetable for the launch.

Morgan Stanley launched the Commodities Alpha Fund last month. That fund is benchmarked to the Dow Jones AIG Commodity Index. Morgan Stanley did not return a call for comment.

Commodities have been one of the fastest growing segments of the ETF market this year, and Hougan said he expects that to continue. "They give investors a way to invest in commodities for the first time at a reasonable price and commodities give them non-correlated investment opportunities. It doesn't hurt that they've been going like gangbusters recently," he said.

Dolan said that while there are good arguments for having commodities as part of a diversified portfolio, investors need to be wary. "While these funds have done extremely well they are very volatile. I don't know when there will be a peak, but it's going to happen...people who get in at the tail end are going to be very disappointed," she said. --Mike Schnitzel

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