Commodity ETFs Upping Their Game?

We keep regular tabs on a handful of long-only commodity ETFs (UNG, USO, and CORN), specifically how much these funds underperform the futures contracts for the same underlying commodity. We believe that managed futures, which can go long or short depending on market conditions, is a better investment strategy. But if you’re going to go long commodities, ETFs are not a particularly efficient means of doing so – and the data continues to bear that out.

But now it looks like we may need to broaden our look at commodity ETFs, as some new challengers have appeared that, at least on paper, claim they will be able to avoid the lackluster performance that has plagued their peers. MSN Money reports:

Take the UBS E-TRACS DJ UBS Commodity Index 2-4-6 Blended Futures ETN (BLND), which only has around $10 million in assets. The exchange-traded note tries to navigate a problem called contango — which occurs when current future prices are lower than contracts reflecting what prices could be a year from now — by buying futures contracts out in various months and “blending” them to create the index.

ETFs based only on current prices lose money if a market is in contango because they have to buy the higher-priced, longer-dated contract and sell the cheaper spot month. So they are selling low and buying high. The United States Natural Gas Fund (UNG) has consistently been a loser for investors because of issues of contango.

Will this prove more efficient than the traditional approach? Tough to say… they’re still not entirely eliminating the problems with frequent rolls (which is why we advocate that long-only investors roll just one time per year), and they could have a marketing problem with the ETF not matching the performance of the index it tracks in the short term. Will investors be willing to not make what the index makes on any single day/month/quarter in order to more closely track what the index makes in a year? That requires some advanced investing logic and willingness to seek long term results over short term gratification – something the average investor isn’t exactly known for.

For our part, BLND contains a basket of commodities, which makes it more difficult to compare against the underlying futures contracts. Nevertheless, it’s nice to see someone else acknowledging the problems dragging down many of the commodity ETFs out there.

Unfortunately, the rest of the article goes off the rails, arguing that commodity investors should “keep it simple” by investing in ETFs that track the producers the commodities – mining companies, agriculture companies, oil companies… and we can only shake our heads.

Sorry, but buying Exxon is NOT the same thing as being long crude oil. And we’re far from the only ones to criticize the idea of using mining companies to gain exposure to the metal markets. With the proliferation of ETFs tracking various combinations of companies and resources, it sounds like the ETF universe is trying hard to produce a better offering. We’ll be waiting for the data to provide a verdict, but until then, we remain unconvinced.

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Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

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The mention of general asset class performance (i.e. managed futures did well, stocks were down, bonds were up) is based on Attain’s direct experience in those asset classes, estimates of performance of dozens of CTAs followed by Attain, and averaging of various indices designed to track said asset classes.

It should be noted that past market performance is not indicative of future market movement.No market data or other information is warranted by Attain Capital Management as to completeness or accuracy, express or implied, and is subject to change without notice.

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Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.