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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