Commodities Are Still Attracting the Adventurous

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". . .some commodity producers might report better-than-expected earnings for the second quarter. . ."

Natural resources funds have certainly lived up to their reputation for volatility. After an extreme roller-coaster ride in 2008, when commodity prices skyrocketed over the summer, only to plummet in the fall, those prices climbed steadily in the first half of this year.

In the second quarter, the natural resources fund category rose by 21.1%. But it still wound up roughly 50% lower than where it finished the second quarter of 2008.

Michael Herbst, the lead natural resources fund analyst at Morningstar, said that these ups and downs showed why these funds were not right for some investors. "If someone is uncomfortable with that volatility, then it increases the chance that they will buy and sell at the worst times," Mr. Herbst said.

But if investors can take the stomach-churning market moves—and have a long-term investment horizon—it isn't necessarily too late to buy a natural resources fund. "Putting aside the timing issue, which is very difficult to call," Mr. Herbst said, the funds may still be a good source of portfolio diversification, as well as a possible hedge against the risk of inflation.

Although deflation has been more of a concern lately, many investment strategists expect inflation to be an issue down the road, at least in part because of steps that the government and the Federal Reserve have taken to stimulate the economy.

Natural resources funds come in two distinct flavors. Some contain the stocks of commodity producers; others allow investors to bet directly on rising commodity prices.

Edward E. Yardeni, an independent investment strategist, said that by this point, the stock funds might be a better deal. "A couple of years ago, commodity prices started rising dramatically on expectations that the emerging economies would need more commodities," Mr. Yardeni said. "And we saw how badly that ended."

But he said that some commodity producers might report better-than-expected earnings for the second quarter, which could give a lift to their stocks. "Cost-cutting was the big story in the first quarter," he said. "For them, it's just a matter of shutting down wells, rigs and mines, which they can do in an instant."

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