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Commodity investors got an unpleasant surprise last week, as a sector that had been on a steady climb suddenly took a nosedive. And while it's true that gold, silver, oil and other materials do tend to take the stairs up and the elevator down -- as the saying goes -- there are ways to invest in them that don't require Dramamine.

Investors have been attracted to commodities since the market crashed. They ploughed $49 billion into exchange-traded funds that invest in commodities from 2008 to 2010 -- a 166% increase over the previous three years -- lured by the promise of stability and ballast against a rocky stock market. All the more reason last week's belly flop really hurt: Commodity prices plunged, led by a sharp 26% decrease in the price of silver and declines in the price of oil and gold. ETFs tracking the sector also posted losses: The $364 million PowerShares DB Silver fund (DBS) dropped 20%, while the $1.8 billion United States Oil fund (USO) fell more than 13% and the $582 million PowerShares DB Precious Metals fund (DBP) slid more than 7%.

But investing in a commodities ETF doesn't have to be a roller coaster ride. According to an analysis of the commodities ETF category for SmartMoney.com by Morningstar, six commodities ETFs on the market have been less volatile than the SPDR S&P 500 ETF (SPY) over the past three years, meaning day to day movements in those ETFs haven't been as drastic as those in one of the biggest and broadest stock ETFs around.

 

Insights into Gold, Commodities Investing

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At a MarketWatch Investing Insights live event, money managers point to strengths and weaknesses in gold, silver and other commodities.

Generally speaking, the least volatile commodities ETFs Morningstar found included agriculture funds, diversified funds that track broad baskets of commodities and precious metals funds. In fact, aside from short, sharp drops like the move last week, commodities ETFs should be less volatile than stock ETFs over the long term, because while a company could go belly up, "people need to eat, and we need to fill our cars with gas," says Abraham Bailin, an ETF analyst with Morningstar.

Commodities ETFs will never be as stable as bond funds or money-market funds, of course. And while an ETF that tracks a broad group of commodities should consistently be less volatile than a fund that follows a single commodity, the smooth ride investors have been getting in precious metals funds may not last. Some investment advisers also question whether individuals need a long-term position in commodities at all. "We use them tactically, as a bet to try to make a profit and move on," says Herb Morgan, the chief investment officer for Efficient Market Advisers, which uses ETFs to build client portfolios.

For investors who see commodities as a good way to hedge against inflation or to simply diversify a portfolio, here are a few options that could provide less-volatile returns:

Livestock. The two least-volatile commodities ETFs over the past three years have been the $5 million UBS E-TRACS CMCI Livestock Total Return ETN (UBC) and the $104 million iPath DJ-UBS Livestock Total Return Sub-Index ETN (COW) . Demand for livestock is much less sensitive to boom-and-bust economic cycles than other commodities, driven by the size of the world's population rather than the level of business activity, Bailin says. Returns, however, pale in comparison to roaring precious metals funds: The UBS Livestock ETN is up 10% in the past year, while the iPath product has slipped 0.36%.

Broad baskets. The third-steadiest commodities ETF is the $864 million GreenHaven Continuous Commodity Index ETF (GCC), which tracks an index of 17 commodities, including oil, gold, silver, corn, wheat, and livestock. All 17 commodities are equally weighted, and the fund rebalances every day. Funds that track a broad group of commodities are typically less volatile than funds that follow just one, and this fund's constant rebalancing further lessens the impact of a big move in the price of any one commodity, Bailin says. However, that constant activity also boosts the fund's cost it charges 1.08% in expenses, high for an ETF. The GreenHaven ETF has gained 41% in the past year.

Gold. Two gold ETFs round out the top five on the least-volatile list -- the massively popular $60.6 billion SPDR Gold Shares (GLD), backed by actual gold, and the $284 million PowerShares DB Gold fund (DGL), which tracks gold futures. These two ETFs each gained about 21% in the past year, and about 20% annually over the past three years. It may seem surprising that funds tracking gold prices were less volatile than a fund tracking the S&P 500, but until last week, "there's been an unimpeded upward move in gold," Bailin notes.