Commodities have been a hot area for investors, and the growing economic strength of the populous nations of India and China could keep the heat turned on. The challenge for clients interested in commodities is to choose the most suitable investment vehicles, as well as the right commodities, from a wide range of possibilities — everything from precious metals to wool.

“We are in the middle stages of a multi-year bull market for commodities that has years to go,” says Jim Rogers, a commodity-investing guru. “There will be corrections along the way for every commodity, but we are going to be looking at much higher prices in the years ahead.”

Rogers made his name as co-founder of the Quantum hedge fund with billionaire investor George Soros in the 1970s. Rogers is also the founder of the Rogers international commodity index, which represents 36 commodities, including wheat, corn, rubber, live cattle, lean hogs, oil, gas, orange juice, adzuki beans, rice and all the major metals, including gold.

“Commodities are the only bull market in the world right now,” says Rogers. “Stocks are not in a bull market; neither are bonds. If you want to be in a bull, this is where it is. Commodities are where the fortunes are going to be made over the next 10 years.”

Oil and gold prices have been soaring, but lesser-known commodities such as coal and potash are also on an upswing. Money can also be made playing the short side of commodities — for example, creating opportunities for those who think the U.S. housing slump may weaken demand for copper, lumber and other materials used in construction.

Rogers is most bullish on agricultural commodities because of the anticipated demand from India and China. At the same time, the movement to alternative fuels is putting a strain on certain agricultural goods. Corn is experiencing growing demand because of its use in ethanol, and farmland that is being converted to corn is crowding out other crops and creating supply shortages.

“The number of acres devoted to wheat farming has been declining for 30 years, and inventories of food around the world are the lowest they’ve been since 1972,” Rogers says. “Supply and demand is getting out of whack — there are fundamental reasons to buy agriculture.”

There are a variety of ways to get exposure to commodities, with varying degrees of risk and reward. The most aggressive stance is to trade commodity futures contracts directly, a leveraged game with high risks and potentially high rewards.

There are also a variety of funds and structured products that tie their returns to indices representing commodity futures. These products typically do not entail leverage on the part of individual investors and are, therefore, a more conservative way to approach commodity investing.

> Trading On Your Own. Com-modities typically are traded through futures contracts, which promise delivery of a commodity at a future date and a pre-set price. The investor does not plan to make or take delivery of the actual commodity, but merely wants to trade the futures contract. Because only 5%-10% of the value of a contract is normally put down as collateral, the leverage is extremely high. Price swings can be sharp and sudden, and traders can be wiped out quickly unless they are able to put up more margin if the commodity price is going against them.

For example, if a trader puts up 5% of the value of a $100,000 futures contract, and then the contract value drops by any more than 5%, the position will be closed out and the deposit will be lost unless the trader can keep meeting margin calls to stay in the game.

“For individuals who want to participate, it’s unbelievably dangerous. The volatility is extreme and you have to have the capital to hold on,” says Douglas Sereda, money manager, commodities trader and CEO of Vancouver-based Asset Logics Capital Man-agement Inc. “For most people, it’s pretty hairy. I’ve seen too many people go into it bright-eyed and bushy-tailed and get clocked.”

“Trading futures is not a buy- and-hold investment,” adds Frank Abrams, an investment advi-sor with MF Global Canada Co. in Toronto. He suggests employing minimum “risk capital” of $50,000.

@page_break@“It is speculative and requires frequent attention,” he says. “Traders need to devise and stick to appropriate risk-management strategies, such as using stop-loss orders or exiting unprofitable trades while the loss is still small.”

> Going The Index-Linked Route. For clients who believe the long-term direction of commodities is up, one of the safer ways to play the trend is through commodity index-based products such as investment funds and structured products. These track the movement of futures prices, but they do not actually own or trade the underlying contracts.

These products don’t involve leverage from investors, and are based on the direction of a basket of commodity futures prices. The index products are “long” investments, meaning that when the value of the underlying commodities rises on average, the index goes up; when underlying commodity values fall, the index falls.

Several products are available that link returns to commodities indices, including the Rogers index, the Dow Jones-AIG commodities total return index and the Goldman Sachs commodities index.

For example, in June 2006, Criterion Investment Manage-ment Ltd. of Toronto introduced Criterion Diversified Commodities Currency Hedged Fund, a mutual fund aimed at providing exposure to the Dow Jones-AIG commodities total return index, which, in turn, is based on a basket of 19 commodities. Because currency can be one of the most dramatic and unpredictable factors affecting global investing, the fund is hedged to take currency risk off the table for Canadian investors. As of Oct. 31, the fund had a one-year return of 8.9%.

There are also a handful of principal-protected notes in the Canadian market with returns directly tied to commodities:

> Sentry Select Capital Corp. of Toronto offers two series of Sentry Rogers International Commodities Protected Notes, based on the Rogers international commodities index. The notes had gained 7.9% for the year ended Oct. 31.

> TD Bank Financial Group, in partnership with Jovian Capital Corp. , both based in Toronto, launched TD Agricultural Growth Notes this past summer. The notes are linked to an underlying basket of four agricultural commodities — wheat, corn, soybeans and livestock.

> ONE Financial Corp. of Toronto recently introduced Series 2 of its ONE Financial Cash+ Breakfast Note, which has exposure to the S&P Goldman Sachs commodities index for agricultural and livestock commodities.

“Commodities are highly volatile, so accessing them by a note may be a prudent choice for [retail] investors,” says Raj Lala, managing partner at JovFunds Management Inc. , a Jovian subsidiary. “The types of commodities in the agricultural note are not easily accessible to the average retail investor by other means.”

U.S.-listed products are also available that tie their returns to commodity indices, including the Barclays Bank-sponsored iPath Dow Jones-AIG Commodities Total Return index Exchange-Traded Note and the iPath S&P GSCI Total Return Index ETN. These products trade on the New York Stock Exchange. (ETNs are similar to exchange-traded funds, except they have maturity dates upon which they will be redeemed by the sponsoring institution.)

Barclays recently introduced eight ETNs tied to subindices of the Dow Jones-AIG commodities total return index, covering agriculture, copper, grains and energy. IE