3 Paths to Commodity Exposure: Which one works best for you?

Each month, we write a post, crunch the data, and see how commodity ETF’s (path 1) are performing against the commodity futures markets they are supposed to be tracking, under the assumption that investors would be better off just buying the December futures contract annually (path 2) instead of getting exposure through the ETF’s. This year has been closer than normal in the energy markets, while investors were much better off going the futures route in other markets.

But after looking at the final numbers across all of these commodities… an investor looking for the best commodity exposure might say that losing -14.00% (via Path 2 – Futures) versus -16.67% (via Path 1 – ETF’s) still has a bit of a problem – they are both losers (Disclaimer: past performance is not necessarily indicative of future results). It’s all fine and good to lose less, but what about not losing at all?

Now, nobody can promise there won’t be losing years – but the commodity exposure most investors have, does have a promise – the promise to have losing years when commodities are falling. They only make money when the commodities they track are going up (and maybe not even then with the problems of roll yield), and will (by definition) lose money when the commodity markets are falling.  Now, more than a few people think that is rather limiting, and think a better path is to be able to make money in commodities whether they go up or down, whether commodities are rising or falling.

These long/short commodity (Path 3)  folks happen to live in the managed futures world, and are usually called Agriculture Traders (download our free whitepaper detailing the approach of Ag Traders to complex and sophisticated grain markets). And there happens to be an index tracking their performance, the BarclayHedge Ag Trader Index . So without further ado, how have the long/short commodity traders (the Ag Traders) performed during the down year for commodities? They haven’t knocked the cover off the ball, but up +2.67% so far in 2013 is a heck of a lot better than down double digits (Disclaimer: past performance is not necessarily indicative of future results).  A long/short commodity investor we know describes it like this… You wouldn’t buy a car that only goes forwards, so why invest in something which has to have markets only go up.

ETF Underperformance(Disclaimer: Past performance is not necessarily indicative of future results)

So which path is best for you? The risk to investing in a long/short commodity manager is that they won’t capture the full upside when and if commodity markets do rally higher, as there is no guarantee they will capture the up moves, or the down moves for that matter. But we would sure prefer the flexibility and possibility of capturing both sides than the certainty of capturing one side.

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DISCLAIMER

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.

*The mention of specific asset class performance (i.e. +3.2%, -4.6%) is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship and self reporting biases, and instant history.

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.

Managed Futures Disclaimer:

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.