ETF Talk: Commodities — The Population Play

As investors, one of our responsibilities is to pay close attention to the key trends affecting the global economy. One of those trends is an increasing worldwide population.

Actual population growth, as well as future projected population growth, will likely spur all kinds of changes, including an increased demand for nearly all commodities.

If we look at the following chart of world population growth, we see massive numbers of new global citizens on the way — citizens that are going to require essentials such as food, clothing and shelter.

According to the U.S. Census Bureau, world population increased from 3 billion in 1959 to 6 billion by 1999, a doubling that occurred over 40 years. The Census Bureau’s latest projections imply that population growth will continue into the 21st century, albeit at a slightly slower pace.

For investors who want to ride this population wave, I offer you the PowerShares DB Commodity Index (DBC), an exchange-traded fund (ETF) that seeks to track the performance of the Deutsche Bank Liquid Commodity index. The fund invests in a portfolio of exchange-traded futures on commodities comprising the index. The index commodities are crude oil, heating oil, aluminum, gold, corn and wheat.

With economies around the world struggling to recover from a global recession, commodity prices as represented by DBC have been kept well below their long-term, 200-day moving average, seen here in the following chart.

However, the protracted pullback in commodities likely will prove to be temporary, and that could mean a very nice buying opportunity in DBC.

DBC revolutionized the ETF market by providing a way to invest in commodities. The fund not only contains popular picks such as gold, but it also includes soft commodities, such as corn, and that makes it different than other commodity funds. DBC has an average trading volume of 2,441,990, well above my preferred minimum trading volume of 100,000 shares.

Here’s a rundown of the top holdings in DBC, as of March 31, 2009.

Top Holdings

Because natural resources offer comparatively low correlation to other asset classes, they can outperform other investments, particularly when the stock market is lagging. An allocation to commodities also can help reduce the overall volatility of a portfolio. Of course, the commodity markets can be very volatile, so be sure you are ready for a roller-coaster ride if you decide to climb aboard the commodity wagon.

If you want specific advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here . As always, I am happy to answer any of your questions about ETFs. To send me your questions, please click here . I will try to respond in a future ETF Talk.