| Mutual funds offer investors a conventional | | | | contrast, index-based commodity funds employ a |
| approach for adding commodities to their | | | | passive style, which means that no decision |
| portfolios. With the funds, investors do not have | | | | making is done in an attempt to outperform the |
| to worry about picking individual stocks or | | | | benchmark index. Instead, the fund tracks a |
| becoming knowledgeable about futures and | | | | certain index and generates a return that mirrors |
| options on futures, two of the more difficult | | | | that benchmark. |
| investing instruments in the financial marketplace | | | | INVESTMENT HOLDINGS |
| today. Funds offer diversification and instant | | | | Traditional funds buy and sell stocks of |
| exposure to the commodities market an investor | | | | commodity-related companies much like any other |
| is targeting. | | | | non-commodities-related fund. Conversely, |
| Investing in mutual funds that target the | | | | index-based commodity funds do not hold stocks |
| commodities market makes sense for many | | | | but instead hold futures and options on futures. |
| investors, particularly those who want to entrust | | | | Although the holdings may differ, each type of |
| the management of their accounts to others | | | | fund provides investors with exposure to and a |
| because of lack of expertise, minimal time to do | | | | means to invest in commodities. |
| research and place trades, or little desire to | | | | COSTS |
| manage their own portfolios. This Instrument can | | | | This is another area in which the two types of |
| be the right approach for many investors looking | | | | funds differ greatly. Because of their active |
| to add commodities to their portfolios rather than | | | | investment management style, traditional |
| trade commodities outright. | | | | commodity funds charge approximately two to |
| Characteristics | | | | three times the fees that index-based commodity |
| There are two types of fund categories you | | | | funds charge. Index-based funds use computers |
| should know about: traditional commodity funds | | | | to track their indexes, whereas actively managed |
| and index-based commodity funds. There are four | | | | funds have a full staff of fund managers and |
| primary differences between the two categories:o | | | | research analysts who command top |
| Investment management style (active versus | | | | compensation. |
| passive)o Investment holdings (stocks versus | | | | RISK-RETURN PROFILE |
| futures)o Costs (higher versus lower)o Risk-return | | | | Traditional funds typically have more risk than |
| profile (higher versus lower) | | | | index-based funds, but they have a higher return |
| INVESTMENT MANAGEMENT STYLE | | | | potential. Traditional funds exist only because they |
| The most important difference between | | | | offer the potential to outperform the market. At |
| traditional commodity funds and index-based | | | | the same time, they have higher risk than |
| commodity funds is investment management | | | | index-based funds since they are actively |
| style. Traditional funds employ an active style, | | | | managed, and that means you must depend on |
| which means the fund managers focus on | | | | the skills of the manager rather than simply |
| security selection-stock picking-and market timing. | | | | earning the return of the market. The higher risk |
| The aim of active management is to pick stocks | | | | and the higher return potential are both a benefit |
| at the right times that will generate returns that | | | | and a drawback. |
| outperform an appropriate benchmark index. In | | | | |