Investors looking for ways for the highest investment returns tend to look beyond the stock market towards the futures market. Trading in futures long and short can involve more risk then trading in the stock market. This can happen if an investor is long a particular investment such as Oil Futures. If an Oil contract goes “limit down” the investor can be caught on the wrong side of the market with no way out.
There are other ways investors can take part of the benefits of the futures market without trading futures contracts or options on futures. Let's review a few areas first starting with the least commonly known investment vehicles.
1. Royalty Trusts (RT) generate income from the production of natural resources such as oil and gas. When an investor buys a RT they are paid dividends on the sale of the natural resource. When production increases so do the dividends paid to investors. The yields on RTs can be 8% or more a year. In additional to providing income RTs have capital appreciation by share price growth. Some examples of Royalty Trusts are Permain Basin (PBT) for oil and gas or San Juan Basin (SJT) for natural gas,
2. Master Limited Partnerships (MLP) unlike Royalty Trusts an investor is paid dividends on the business such as a pipeline. There is another advantage of trading in MLPs and investor can purchase a closed end fund that holds a group of MLP which in theory should reduce risk. This is discussed in the next section.
The following MLPs are highly held in many closed end funds: Energy Transfer Products (ETP), Kinder Morgan (KMR), Magellan Midstream (MGG).
3. Closed end funds (CEF) provide the opportunity for an investor to buy under the market if the CEF is trading to a discount to the Net Asset Value (NAV). There are closed end funds that invest in MLPs and an investor may chose this route to limit risk by purchasing a group of MLPs. A few of these are First Trust Energy and Growth (FEN), Claymore MLP (FMO), Gabelli Gold and Natural Resources (68% Gold) (GGN).
4. Exchange Traded Notes (ETN) "look and feel" like an ETF but there are a few major differences. An ETN is an unsecured debt security that is used to track an underlying index. The caution for investors is that unlike an ETF, if the issue of an ETN goes bankrupt and investor may loose all the investment or wait in line in bankruptcy court to get pennies on the dollar. iPath has one of the largest selection of ETN that track Oil (OIL), Natural Gas (GAZ), Livestock (COW), and every other sector of the futures market.
5. Many Exchange Traded Funds (ETF) for the energy sector are commonly known. There are commodity ETFs that hold futures contracts such as US Oil (USO), US Natural Gas (UNG). PowerShares Products Crude Oil (OLO), Commodity Tracking (DBC) Energy (DBE). There are other products that track oil companies such as PowerShares Oil Exploration (PXE). In summary an investor can add commodities to their portfolio by using the investment vehicles noted in this article. Commodities provide a level of diversification and separation from the major stock market indexes.