In Defense of "Commodities Rex"

One of my favorite exchange traded fund commentators, Don Dion, recently penned a piece for TheStreet.com called Sensible Commodity ETF Investing, which you can read here. In the article, Don describes an investor type which he dubs "Commodities Rex". The Commodities Rex has a passion for everything hard asset based. From wheat to oil, neodymium to cotton, a Rex wants it all. The investor archetype will go out of his way to add these things to a portfolio. His equity holdings will most likely be in the form of a fund like Market Vectors Agribusiness (NYSE: MOO), his international holdings in SPDR S&P Russia (NYSE: RBL).

Essentially, the article explains how the ETF boom has made it easy for commodities to sneak into all facets of a portfolio. In doing so, the Rex misses the mark when it comes to diversification. Don warns by holding all these pieces together an investor may think that he's taking a diversified approach to playing the markets. The reality is, he has constructed a portfolio that has tremendous exposure to the commodities and ultimately miss out on other catalysts for global growth.

Hard Assets Anonymous

After reading the article, looking at my own writing and examining my own holdings, I've come to the terms that I'm a Commodities Rex. Although, I'm not ashamed. Ninety percent of my writing is based on two things; commodities (including alternative energy and infrastructure) and the growth of emerging markets. I still think investors with long-term time lined are better suited with commodities than say Apple (NASDAQ: AAPL).

I'm more comfortable investing in developed markets like Canada or Australia, where natural resources buoy their strong currencies and fiscal discipline, than someplace France. I'm far more bullish on Emerging Latin America over China, due the fact they have many of the commodities Asia needs. Those resource dollars will trickle down to growing middle class and in turn, they'll buy more iPads. But, its commodities that run the show.

Long-Term Demand

My love and portfolio allocation to physical goods stem from one simple idea; population growth.  Exploding populations worldwide have added increased pressure on the planet's natural resources. This insatiable demand for hard assets is touching all aspects of modern living. Metals and other materials are needed to build infrastructure. Vast amounts of energy resources are needed to provide electricity and to power transportation. Soft commodities, such as corn and wheat, are needed to meet the world's growing middle class demand for meat and other foods. Accounting for more than 14% of the world's economic output, commodities form the basis for all goods and services.

They key to all of this is long-term demand. Over the short-term, rain or drought can play havoc with grain prices and the iPath DJ-UBS Grains ETN (NYSE: JJG) moves accordingly. The IEA releases its oil storage data and Energy Select Sector SPDR (NYSE: XLE) rises or falls. Using a longer horizon, over the past 15 years, crop yields have risen only by 1.2%. This is with advances in agricultural fertilizer and irrigation methods. But demand has surged, outpacing supplies. For energy it's a similar story. Non-OPEC members have been struggling with relatively flat oil production for the past 10 years.

Commodities Still Make Sense

In terms of being bullish and perhaps over-weight on commodities, yes I'm a Commodities Rex. The long term demand for hard assets is too good of a trend to pass up. However, I do understand where Don is coming from. If investors feel like they are too commodities heavy, the ETF boom has answers as well. Adding positions in something like Technology Select Sector SPDR (NYSE: XLK) or the iShares Dow Jones US Consumer Goods (NYSE: IYK) are easy fixes to rid yourself of the Rex title.