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A labourer works at an aluminium factory in Datong County, western China's Qinghai province

Commodities ETFs are all the rage, and investors can get their hands on hard assets with a variety of broad, specific strategies. Hard-asset ETFs are a good way to diversify your portfolio and protect against inflation and broader market turmoil.

As the ETF industry grows, it is increasingly important to select the right fund for your investment needs. Before snatching up shares of hard-asset funds, it is important to build awareness of the products available today and the outlook for the future.

Equity-based, hard-asset ETFs

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SPDR S&P Metals & Mining focuses on U.S. metals and mining firms, with industry giants like Arch Coal, United States Steel and Alcoa counted among its top components. The fund's relatively low concentration and low 0.35 per cent expense ratio make XME a good starting place for new hard asset investors.

Market Vectors-RVE Hard Assets Producers ETF tracks the Rogers-Van Eck Hard Assets Producers Index, often viewed as the definitive global benchmark for commodity equities.

In addition to metals and mining, HAP includes water and renewable energy among the hard assets in its portfolio. Top HAP components include Monsanto, Exxon Mobil, Potash and Deere.

Futures-based, hard-asset funds

In 2008, iPath launched a line of commodity ETNs that give investors broad or specific exposure to hard assets. Each fund tracks a basket of futures contracts and Treasuries, designed to give investors exposure to the price of the underlying commodity.

These funds are the riskiest of the batch, due to regulatory concerns and debt structure. Since the funds are comprised of notes, rather than equities, investors are exposed to the credit risk of the issuer. Anticipated changes to futures regulation could also restrict the size of these funds and impact their trading capabilities.

One fund that offers multiple commodities is iPath Dow Jones-UBS Industrial Metals Subindex Total Return .

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The single hard-asset funds include iPath Dow Jones-AIG Tin Total Return Sub-Index ETN , iPath Dow Jones-AIG Platinum ETN Total Return Sub-Index , iPath Dow Jones-AIG Lead ETN Total Return Sub-Index and iPath Dow Jones-AIG Aluminum Total Return Sub-Index ETN .

Booming industry

The ETF industry is booming, and exchange traded commodity funds are a particularly popular segment. While futures-based commodity products could face regulatory curbs in the near future, physically backed commodities funds should be unscathed.

ETF Securities, a London-based issuer, has had tremendous success launching lines of physical exchange traded products across the globe. From London to Tokyo and the U.S., investors can't seem to get enough of the hard-asset products. ETF Securities currently has two products trading in the U.S., ETFs Silver Trust and ETFs Gold Trust .

If the success of other ETF Securities products abroad is any indication, U.S. investors could soon see the debut of other products. Investors should keep an eye out for hard-asset funds like palladium in the months ahead.

Glencore International and Credit Suisse are reportedly teaming up to launch a physically backed aluminum fund in the months ahead. While aluminum is harder to store than metals like gold and silver, Glencore is said to have amassed 1 million tons of aluminum this year. It will be important for the firm to gather critical mass before unleashing this ETF in the open market.

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While JJU currently offers investors exposure to aluminum prices, the fund is backed by futures. Since upcoming regulatory limits are still uncertain, a new physically backed aluminum fund would be a safer bet.

Hard-asset exchange traded products give investors exposure to gold, silver and beyond. These funds can help to diversify a well-rounded portfolio. Regulatory limits may soon limit the size of funds like JJN and JJM, so investors should consider physical hard-asset ETFs when available. Make sure to keep an eye towards liquidity and regulatory changes as you add these unique products to your investment mix.

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