I•
T•
’S Y•
O•
U•
R
Timothy Middleton Small Investors Gain Access to Alternative Investments O
NE of the unsung sto- ries of 2010 was the rise in the price of gold. The yellow metal shot up in value over the year by about 20 per- cent, from around $1,120 per ounce to more than $1,400. Not surprisingly, demand for the metal has surged, even though most retirement plans still shun gold, and it is taxed as a collectible, not an investment asset. A single exchange-traded fund, SPDR Gold Shares (GLD), owns 1.3 metric tons of it—more than any nation except the United States, Germany, Italy, and France. Gold is just one of a growing number of alternative invest- ments that are increasingly avail- able to the individual investor. In years past, such investments were accessible only to profes- sional portfolio managers, fre- quently in the form of
futures,
options, and other derivative in- struments. Today, they are avail- able in more familiar forms, such as mutual funds.
The allure of alternative invest- ments is two-fold. On the one hand, all of them are capable of delivering outstanding total re- turns, creating tempting opportu- nities for aggressive investors. On the other hand, their performance tends to correlate only weakly, if at all, to that of the standard investment
duo, stocks and
bonds. This makes them attrac- tive
8 to conservative investors,
Alternative investments are capable of delivering outstanding total returns.
who can use them to lower risk in a portfolio by lowering overall price swings. Here are four alternative in- vestment categories of interest to small investors.
Precious Metals Many banks and even depart-
ment stores sell individual gold coins, such as American eagles and Chinese pandas, which typi- cally weigh between a tenth of an ounce and a full ounce. Spe- cialty dealers also sell gold bars, from one ounce to more than twenty pounds. Safely buying a large amount of physical gold, however, requires the purchaser to hire expensive guarded trans- portation and have a safe stor- age facility.
The more convenient way to
own the metal is through ex- change-traded funds (ETFs). This way the investment company bears the costs of transportation and storage, though they pass these costs on in the form of fees. In the case of SPDR Gold Shares, shareholders are charged 0.40 percentage in an- nual fees. That might not sound like a lot, but it has produced this strange result: When issued in 2004, each share of the ETF rep-
resented one-tenth of an ounce of gold. Now so much has been drained away that each share represents 98 percent of one- tenth of an ounce of the metal. Mutual funds offer a different exposure to precious metals through ownership of stocks in the companies that mine them. This approach has its pluses and minuses. On the plus side, a small increase in gold’s price can generate a very large increase in profits because higher sales prices don’t cost anything extra in overhead. On the minus side, however, mining companies can be mismanaged or run low on reserves, and the investor shares in this risk.
Other Commodities
While it’s still possible, if not convenient, for an individual in- vestor to take physical posses- sion of precious metals, taking physical possession of other com- modities is completely impracti- cal. The only way for individuals to invest in most commodities, such as petroleum, wood, rice, wheat, or copper, is through sec- ondary vehicles such as mutual funds or ETFs.
Most fund companies and many 401(k) plans offer natural
resources mutual funds. These funds typically have about 80 per- cent of
their assets in energy, because that is by far the most- used commodity. But they also tend to own lumber and mining companies.
In recent years a number of ETFs have been created to pro- vide very targeted portfolios for individual commodities, or groups of them, such as agricultural prod- ucts. PowerShares DB Agricul- ture (DBA), for example, uses futures contracts to provide in- vestments in corn, wheat, soy beans, and sugar. For those in- terested in the industrial metals, such as zinc, copper, aluminum, and nickel, the rather awkwardly named iPath DJ-UBS Industrial Metals TR Sub-Index ETN (JJM) tracks these important materials.
Commercial Real Estate Introduced two decades ago, real estate investment trusts (REITs) represent pools of com- mercial properties in such indus- tries as shopping malls, residen- tial apartments, and industrial and office buildings. REITs deliver re- turns in two ways: rental income, which is distributed to sharehold- ers frequently, and capital gains, which come when the value of the pool of properties appreciate. Over the last fifteen years, those returns have averaged 10.8 per- cent annually, according to (Continued on page 72)
F E B R U A R Y 2 0 1 1
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80