Wall Street's financial magicians never take a break from innovating. There seems to be a way to play the financial angles on almost everything human beings deal with as they go about their daily business. Investors can make bets on everything from the weather and nuclear energy to the powdery stuff that goes into your energy drink.
Here are some of the offbeat ways investors—financial pros and fearless individuals alike—can get a piece of the action:
As the old saying goes, everybody talks about it, but no one does anything about it. Well, some investors might disagree. Hundreds of thousands of people trade weather futures on the Chicago Mercantile Exchange. Since their launch in 1999, these futures have been popular among weather-dependent parties like energy companies and farmers, as the number of "hot" days and "cool" days directly affect their businesses. About a million contracts, representing bets on the monthly and seasonal weather in cities from Tucson to Stockholm, change hands every day.
The Job Market
Nonfarm payrolls futures, which will be introduced later this month, allow people to "bet" on the monthly jobs data from the Bureau of Labor Statistics. The report is considered an important bellwether of the health of the U.S. economy and can often influence the direction of stocks and bonds. Thus, payrolls futures could provide an opportunity for investors to hedge their positions when the report is released on the first Friday of each month.
While it's a good bet that few people are making money in the physical housing market these days (take a look at all the "For Sale" signs dotting the landscape), financial pros are trying their luck on housing index-related futures. These futures are based on underlying residential property values, weight-averaged, grouped, and packaged into indexes. Usually, mortgage brokers and developers use them to hedge risks or gain profits as the real estate market gyrates, by buying or selling contracts that pay off on the difference of "estimated" and real housing index numbers.
Futures based on the widely followed S&P/Case-Shiller Home Price Index started trading two years ago on the CME, but the product "has not worked very well" according to a CME spokesperson, as the U.S. housing market headed into a major downward spiral shortly afterward. In theory, retail property owners can use it as a way to hedge or speculate as well, but few people appear to have tried that approach.
While many investors shun the housing market as "radioactive," they might consider putting their money in things that really are. New York-based fund Van Eck Global introduced the first nuclear energy exchange-traded fund last fall as demand for alternative energy soared. And ETF heavyweight PowerShares just launched its own ETF based on nuclear energy on Apr. 3. These ETFs invest in various companies involved in the nuclear power industry by tracking indexes with constituencies in areas from uranium mining, plant infrastructure, and power generation, to storage and transport.
Van Eck's Market Vector ETF has not been particularly successful, with the price down about 25% over the past six months. The fund was heavy in mining stocks and thus was influenced by the price volatility in uranium. The new PowerShares ETF will focus more on power generation.
Agricultural commodities have been enjoying their biggest bull market in the past few decades, with rising demand in food and clean bioenergy across the world fueling the boom. Among the products that have attracted investor attention: whey.
Whey? The stuff that Little Miss Muffet ate with her curds? It turns out that dry whey, a byproduct of the cheese-making process, is a key ingredient in the high-protein, low-fat power shakes that have caught on among health-conscious Americans in recent years. Consumers' thirst for these drinks has helped push up the demand for dry whey.
And some people are making big bucks by betting on dry whey futures contracts traded on the Chicago Mercantile Exchange. High price volatility has made dry whey attractive to commodity traders and commercial users, the two major types of players in the market, for either speculating or hedging purposes. Commercial users—farmers, food processors, or other companies who deal with a particular commodity in their businesses—buy or sell futures contracts to offset their risks as the underlying commodity price moves out of their comfort zones. Professional commodity traders bet on the future price movement of a commodity and pocket the difference between the price on a futures contract and the price in the cash market on a certain date—if they bet in the right direction.
Ever since their debut last year on the CME, where they joined agricultural stalwarts soybeans, corn, and pork bellies, prices of dry whey futures contracts have seen some wild swings. (A pound of dry whey is worth only about one-third of what it was a year ago, based on the April futures contract.)
Whey may not be a good ingredient for most portfolios. "You won't want to touch that. The illiquidity makes it a particularly risky market even for experienced traders," said Steve Briese, an independent commodity futures analyst and author of the industry reference The Commitments of Traders Bible. For most retail investors, it seems that a safer way to play the market and ride the commodity boom would be to put their money into various funds that trade commodity derivatives or stocks.