Article Excerpts From: The Rewards of Multiple-Asset-Class Investing (pdf) From: An Introduction to the Dow Jones - AIG Commodity Index To help insure diversified commodity exposure, the DJ-AIGCI relies on several diversification rules. Among these rules are the following: * No related group of commodities (e.g., energy, precious metals, livestock and grains) may constitute more than 33% of the index as of the annual reweightings of the components. * No single commodity may constitute less than 2% or more than 15% of the index. From: Commodity ETF Overview -- Seeking Alpha, February 12, 2008 From: An Alternative To Taxes? -- Index Universe, May 23, 2007 Tax issues are becoming increasingly important as investors move into alternative assets, which don’t enjoy the same favorable treatment as regular stocks and bonds. My sense is that some people have been caught off-guard by the tax implications of their investments. Here is my cheat sheet: Futures-Based Commodity ETFs (DBC, GSG, USO, DBA, DBB, etc.): There is no deferral of gains with these ETFs. Period. All futures investments are “marked-to-market” at the end of the year. That means if you buy the US Oil Fund (USO) for $50/share and it closes on December 31 at $60/share, you owe taxes on that $10/share gain … even if you never sold the ETF. That’s right: you have to come up with the cash out-of-pocket. These gains are taxed 60% as long-term gains and 40% as short-term gains. From: The Best Ways to Protect Your Money -- Money Magazine, April 8, 2008 The best hedge: a natural-resources fund As for stocks, a traditional hedge against inflation has been natural resources. Reason: Fuels, minerals and agricultural goods have a certain amount of usefulness no matter what. You still need wheat to make bread, and your grocer will sell you a loaf if you slap down a gold coin. But since commodities don't throw off interest or dividends, their price on any given day is just a guesstimate of future supply and demand. And because they've shot up tremendously in short order (gold went from $800 an ounce in December to past $1,000 at one point in March), they carry substantial risks of their own. The stocks of companies that mine, farm and drill for these commodities haven't rocketed as quickly. That's one reason you're better off in a fund like T. Rowe Price New Era ( PRNEX ). This Money 70 stalwart invests in oil and natural-resources companies such as ExxonMobil (XOM, Fortune 500) and Schlumberger (SLB) - not in the commodities themselves. The fund has risks, of course. It has gained nearly 30% a year for five years; if oil prices fall and inflation subsides, you could lose money buying in at this level. So understand what you're getting with New Era: not a chance to win big but insurance against the risk that inflation will get worse. If peace of mind is worth it to you, shift about 5% of your stock portfolio from other large-caps to the fund. That's enough for insurance but not so much that you're betting your future on commodity stocks. From: Diversification with commodities? -- The Bogleheads Forum, May 28, 2008 Larry Swedroe wrote: ETNs Nice for tax purposes but I would not buy them because you are taking two considerable and uncompensated risks: a) Risk of tax treatment being disallowed, this is purely form over substance IMO. b) The credit risk of the issuer. Let's assume that the issuer pays say 0.5% over Treasuries for borrowings. You are taking that credit risk but not earning that extra return. Thus if an ETN costs you say 75bp it is really costing you 1.25%, only you just don't see the bill. ~~~ = Added on 6/5/08