By SARAH MORGAN
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)
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)
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)
Broad baskets. The third-steadiest commodities ETF is the $864 million GreenHaven Continuous Commodity Index ETF (GCC),
Gold. Two gold ETFs round out the top five on the least-volatile list -- the massively popular $60.6 billion SPDR Gold Shares (GLD),