Lara Crigger is Associate Editor of Hard Assets Investor, an educational Web site devoted to commodity education and commentary. Prior to her current role, she was a freelance journalist and copywriter for several years, writing for Vanguard, AXA Advisors, and Index Universe. Ms. Crigger was gracious enough to discuss non-traditional commodities, precious metals investing, and more in an exclusive e-mail interview with ETF Database.
ETF Database: It seems that the retail side of commodity investing has grown by leaps and bounds in the fast few years, much of this growth driven by new availability (in ETF form) and attractiveness (hedging in an equity bear market). Will commodity ETFs continue to attract new investors and asset inflows if equities have a sustained recovery? Are commodities as a class appropriate for most long-term investors?
Ms. Crigger: Talk about a huge topic—I could write several dozen pages on the first question alone! But the Reader’s Digest version: Yes, and yes.
I think we’ll definitely continue to see commodity ETFs attract new blood and inflows—partly because of the growth of the ETF industry as a whole. As investors become more familiar with ETFs and how to incorporate them into a portfolio, they’ll increasingly seek more out, and that interest will include commodities ETFs.
But I also believe ETFs will remain attractive because they remove a lot of the intimidation factor associated with commodities. Let’s face it: The commodities market has a pretty steep learning curve, one that scares off a lot of novices. But commodity ETFs make it so that you don’t fuss around with futures contracts or the derivatives market; you can buy and sell shares just like you would stock. So much simpler.
And as inflation seems increasingly likely, what with all the money-printing the government’s been doing lately, commodities will continue to score attention, considering they’ve historically been such a good hedge against inflation. (More on that later.)
As to whether commodities as an asset class are appropriate for long-term investors: YES! Over the long term, commodities are a great portfolio diversifier: They exhibit low (or even negative) correlation to most other asset classes, and can really reduce your overall risk long-term.
Of course, you have to approach commodities intelligently; you can’t just scoop up MOO and call it a day. Commodities are volatile and cyclical, and if you don’t pay attention, they could definitely kick your butt. You’ve got to be educated on how the commodities market behaves, its patterns and mood swings and driving forces, all of which (shameless plug alert) we try to inform investors about on our site, Hard Assets Investor.
ETF Database: You recently published an article on the bull case for silver. Obviously gold as an asset has a unique value proposition, even among commodities, and gold ETFs had a large increase in asset inflows in the bear market of the past year. But silver ETFs have amassed a large amount of assets recently as well. Do you think silver ETFs will have continued success in the future? As a hedging instrument, how do silver ETFs compare to gold ETFs, as far as the average investor is concerned?
Ms. Crigger: I’m not an expert on silver. David Morgan, my interviewee in A Bull’s Case for Silver, could tell you and your readers much more about silver’s prospects for the future. But personally, I do think silver will have its day, and potentially sometime very soon.
Like I said above, it looks increasingly likely that we could be moving into an inflationary period, and investors are going to start looking for ways to deal. As an inflationary hedge, silver’s great. Historically, it’s performed as well, if not better than gold in periods of inflation.
Even outside the possibility of inflation, there’s increasing industrial demand for silver. Silver’s the backbone of several up-and-coming green/clean technologies, like water purification, solar PV arrays, and silver-zinc car batteries (which are more efficient than their lithium-ion cousins, and have no toxic chemicals to boot).
But at the same time, silver has historically been way more volatile than gold, and it’s a much smaller market, too. Plus, In the past, it’s been susceptible to the movements of a few big players: The Hunt Brothers, Warren Buffett, etc. That’s enough to spook many investors, and it doesn’t look like any of those factors will change any time soon.
On the other hand, SLV inflows were up 22% in the first quarter alone. So we’ll have to see.
ETF Database: As a reporter you cover a lot of “specialty” commodities. (I recently read your article about the universe of carbon exchange-traded products.) What sort of lesser-known commodities could attract more mainstream investor interest in the future? Are there any types of commodities that retail investors could effectively use as a hedge, but which aren’t on their radar yet?
Ms. Crigger: Personally, I think water’s going to be huge. Maybe not tomorrow, maybe not next month—but everyone needs clean water, and there’s just not a lot of it to go around. In the next few years we’re going to see a major, worldwide infrastructure beef-up, and that can really only benefit the water industry: new purification plants, sanitation facilities, utilities, pump/valve/pipe manufacturers, etc. So keep your eye on H2O.
It’s funny that you mentioned carbon futures. As fascinating as I find the topic, I’m not entirely convinced of their long-term viability—or that they can really achieve their purpose of bringing down greenhouse gas emissions. I think we’re probably going to have to see a whole lot more accountability in the carbon market before it’s ever going to take off.
I hope we do, though. I prefer cap-and-trade over a carbon tax.
ETF Database: As a long-term investor, an enticing aspect of commodity ETFs is that they are, theoretically, negatively correlated with equities, so they can help to reduce portfolio volatility and provide positive returns during an equity bear market. In reality, however, it seems that only certain commodity classes actually maintain a negative correlation with equities. What types of commodities and commodity ETFs should investors really focus on if they’re looking for low or negative beta (as compared to the S&P)?
Ms. Crigger: During the past year and a half or so, we saw correlations rise across all asset classes, including commodities. The usual relationships fell apart: commodities pretty much declined in lockstep with everything else.
But this past year wasn’t really your average, garden-variety year, was it? So looking forward, you’ve got to decide whether you believe that these new high correlations are here to stay and will continue for all time, or if you believe the classic low-correlation assets (like energy, precious metals, etc.) will revert to their usual behavior.
Personally, I’m pretty confident things will return to normal eventually. Rising correlations are pretty typical behavior during a financial crisis. Look back through history, and you’ll see that in really bad times, the normal relationships lose their power, and everything moves with everything else. When the markets recover, so do correlations.
ETF Database: Any words of wisdom–perhaps an unconventional investing tip–you could share with our readers?
Ms. Crigger: I’m going to be boring and echo Brad Zigler on this one: Do your homework. Like I said before, the commodities market can be a harsh mistress, and you really shouldn’t jump in without first educating yourself. (In fact, we actually have on our site a great series of thorough, easy-to-understand articles covering the fundamentals of commodities investing: Hard Assets University.)
One last thing: Don’t be afraid to ask questions of people who know more than you. Especially the really dumb ones. Seriously: The dumber you think your question is, the better it is you ask. Because no question you could ever ask will be as dumb as wasting your money on a bad investment when you should’ve known better.
You can reach Lara at firstname.lastname@example.org or follow her on Twitter at username @HAInvestor.