Commodity ETFs Suck – 2012 Edition

Another year has come and gone, which means another year’s worth of data comparing three long-only commodity ETFs (USO, UNG, and CORN) to a strategy of just buying the December futures contract and rolling it annually. No surprise to us – the ETF’s woefully underperformed yet again, by an average of nearly -13%.

How can $2.6 billion invested in these funds be so out of touch on this? And willing to pay a double digit penalty each year for their commodity exposure?  Just to make sure you are reading the table correctly – if you had invested in the CORN ETF at the beginning of the year, you would have made 5.57%. If you had invested in the December Corn futures contract on the same day, and rolled it to the December 2013 contract at the end of November, you would have made nearly16% more. Meaning the ETF lagged its benchmark for the year by 16%! (Disclaimer: past performance is not necessarily indicative of future results).

Maybe it is all a matter of timing? The ETF companies do (sort of) warn  investors that the products are intended to track the daily price of the front month futures contract for each commodity. But how many investors actually realize that the ETF can track the daily price but NOT TRACK the monthly, quarterly, or annual price by anything close to an acceptable tracking error?

Intuitively, it seems like something which tracks the daily price change should end up tracking the annual price change. And I’m sure the marketing folks at these ETFs said the product has to track the daily price as closely as possible – as that is what people see on the news each night and what they expect – to hell with the annual numbers.

And we would see daily tracking equal annual tracking if the ETF invested in stocks or bonds or currencies or really anything besides futures markets. (and, incidentally, that is why the GLD ETF doesn’t suffer the same underperformance, because it doesn’t get its exposure via futures, but via real gold in a vault). Futures markets throw a monkey wrench into things. Crude Oil has 12 different contracts per year, for example, and most of the time the change in one contract is not the same as the change in another. Today, for example, March crude oil futures were up $1.28, while the September contract was up just $0.97 per barrel.

All of these different contract months and different price moves within them can make investing in futures confusing. Indeed, it is not suitable for all investors – as the required disclaimer for those soliciting futures account reads. And that is sort of the underlying beef here from a registered futures firm. How many people are investing in these ETFs without understanding the risks those futures markets present?  How many investors really understand contango and the cost of carry and that futures contracts have a finite life – when they can get access to commodity ETFs with just a click of a mouse in their stock trading account (no futures disclaimers required)?

We don’t think it is a very large number – and for that reason once again would like to shout at the top of our lungs to all $2.6 Billion worth of money trading these commodity ETFs:

Commodity ETFs suck for long term exposure. If you think corn, crude oil, or natural gas is going up in the next 3 to 18 months – DO NOT use the ETFs to get exposure – they are horrendous at tracking the long-term performance of the market.

And we’ll whisper this also:  why get long only commodity exposure when you could get long and short commodity exposure via managed futures and benefit should markets rise or fall?



  1. Sounds like an Arb opportunity to me. No idea how to size the short ETF position though. Any ideas?

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