My Favorite 'One Click' Commodities Investment
Editor's note: The next bull market in commodities is underway.
But there's a right way and a wrong way to get in on the action.
As Steve Sjuggerud explains in today's Masters Series – excerpted from a brand-new special report – the difference between making the right investments could be the difference between losing money or making 1,400% gains...
My Favorite 'One Click' Commodities Investment
In extreme cases, "contango" – when next month's price of a commodity is higher than this month's price – can lead to unbelievable losses...
Consider the case of the Volatility Index (the "VIX"), for example.
Investors consider the VIX to be the stock market's "fear gauge." It tends to rise when the S&P 500 Index falls and uncertainty spikes. And it tends to fall when the S&P 500 rises and uncertainty drops. Because of this relationship, investors like the idea of betting on the VIX if they think stock prices will fall.
The easiest way to make the trade is through the iPath S&P 500 VIX Short-Term Futures ETN (VXX)... which is supposed to track the VIX. However, this fund tries to do so using futures contracts.
Unfortunately for investors, the VIX almost always sits in contango... extreme contango. As a result, shares of VXX have been on a one-way downward trajectory in the long run...
From mid-2010 to June 2018, the VIX was roughly flat. But shares of VXX fell a ridiculous 99.8% during the same period... thanks entirely to extreme contango.
In short, futures-based funds like VXX tend to not do their job very well. And in extreme cases, they can be more dangerous than you can imagine...
That's OK, though. Our "smart" index for commodities solves this problem. That's because it flips the script on contango.
Instead of losing money, this smart index puts futures contracts to work in our favor. And based on history, that's part of the difference between losing money and making 1,400% gains.
Here are the specifics...
The absolute best way to invest in commodities is a simple fund.
It's called the United States Commodity Index Fund (USCI).
Even though its name sounds similar, this fund doesn't have any of the problems we previously highlighted in the United States Oil Fund (USO).
In fact, this fund's unique structure makes it a fantastic way to profit from the commodities boom that's just getting started...
You see, USCI tracks the SummerHaven Dynamic Commodity Index ("SDC"). This index strives to take advantage of situations in commodities that tend to happen over and over to produce superior returns.
In short, instead of buying and holding all commodities like a typical fund, the SDC Index only holds the commodities that history says should perform the best over the following month.
Specifically, it holds 14 of 27 possible commodities based on two simple criteria...
1. First, it owns the seven commodities with the greatest "backwardation." (I will explain that in a minute... But it's basically the opposite of contango.)
2. Next, it owns the strongest seven commodities based on 12-month price change.
These two criteria have proven over decades to make real money. Let me briefly explain them...
The first criterion – backwardation – is simply the opposite of contango. This means the SDC Index specifically buys commodities that allow it to make money by "rolling" positions.
For example, say the current July oil futures contract sells for $65. And say the August contract sells for $64. Unlike the contango situation I described before, this scenario leads to a profit instead of a loss when the position "rolls" forward...
The SDC Index would sell the July contract for $65 and buy the August contract for $64... which results in a GAIN of $1 per contract.
In short, the SDC Index not only avoids the problem that makes most commodity funds terrible investments... it makes extra gains by doing the opposite.
The SDC Index selects its first seven commodities based on this idea... buying the commodities with the largest backwardation available.
It selects its next seven holdings based on the strongest uptrends in commodities (based on trailing 12-month price change).
This is right up my alley. If you've read my work for any amount of time, you know I believe in following the trend. That's as true for commodities as it is for stocks or real estate.
We want to own what's going up, when it's going up... And the SDC Index does exactly that.
When you combine these two ideas – backwardation and following the trend – you end up with a "smart" commodity index. And the combination of these ideas is powerful. The chart from above is worth another look...
This approach leads to incredible outperformance over a "dumb" commodity index... 1,400% gains compared with an index that's losing money.
Simply put, history shows that the thoughts behind the SDC Index work. As I said, USCI tracks this index. And that makes it the absolute best way to invest in commodities.
Obviously, that means we want to own USCI when commodities are in an uptrend. We want to own it when commodities are booming.
And as we've explained, we believe that boom is underway right now. This boom could be the biggest we've seen... because the last bust was the worst we've seen.
I expect we'll lock in gains of 300%, 400%, and possibly even 500% before it's all over.
Good investing,
Steve Sjuggerud
Editor's note: Commodities fit Steve's criteria for a perfect investment – they're cheap, hated, and in the beginning of a powerful uptrend. But you can't buy just any commodity. That's why he's building a portfolio of hand-picked investments for the coming bull market... with the potential to return as much as 1,000% in the years to come. Steve just put together a brand-new video presentation detailing this incredible opportunity. Watch it here.