Commodity Exposure Breakdown YTD

Here’s our monthly look at the various commodity ETFs and how they track a simple strategy of buying December futures and rolling them annually. Plus, a comparison to Ag Traders and an overall commodity index.

Some notes:

  1. Impressed by that UNG outperformance? check these stats
  2. The averages of the ETFs and Futures all are within a percentage of each other.
  3. Ag CTA’s (Active long short agriculture trading) are posting a 8.99% return, beating out the Commodity Index DBC. (See Trade commodities instead of “invest” in  them?)

(Performance as of 8/31/2014)

Commodity ETF Over/Under Performance 2014

Commodity
Futures
ETF
Difference
Crude Oil$CL_F
1.78%
$USO
1.25%
-0.53%
Brent Oil$NBZ_F
-2.03%
$BNO
-5.66%
-3.63%
Natural Gas$NG_F
-2.67%
$UNG
7.59%
10.26%
Cocoa$CC_F
19.06%
$NIB
18.80%
-0.26%

Coffee$KC_F
67.53%
$JO
75.02%
7.50%
Corn$ZC_F
-19.16%
$CORN
-15.79%
3.36%
Cotton$CT_F
-15.12%
$BAL
-15.83%
-0.71%
Live Cattle$LE_F
16.75%
$CATL
9.90%
-6.85%
Lean Hogs$LH_F
15.72%
$HOGS
2.77%
-12.96%
Sugar$SB_F
-9.15%
$CANE
-0.28%
8.87%
Soybeans$ZS_F
-9.78%
$SOYB
-6.39%
3.39%
Wheat$ZW_F
-12.01%
$WEAT
-12.81%
-0.78%
Average4.24%4.88%0.64%
Commodity Index $DBC-2.42%
Long/Short Ag Trader CTAs8.99%

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

A Golf Caddy, his mom, and Warren Buffet on Gold

A caddy on the golf course this past weekend asked one of Attain’s partners (Jeff Malec) what the caddy’s mom should do with her Gold bars. She thought it was a no brainer to load up on a few hundred thousand dollars worth of physical yellow metal back in 2010ish, but is having second thoughts of late with the barbarous relic off more than 30% since its highs, while other commodity markets are making new highs  (Coffee up 75% YTD, Cattle at all time highs – past performance is not necessarily indicative of future results).

Mr. Malec asked the caddy if he had ever heard of Warren Buffet. The caddy said he had, and Mr. Malec proceeded to tell him to pass along Buffet’s thoughts on Gold:

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Here’s some other good Buffet quotes on Gold.

But those reading the Wall Street Journal of late might think the play is to ditch the physical gold and instead invest in Gold Mining companies. The WSJ detailed about a month ago (Aug 8th) how the Gold Miners Index (GDX) was up 26% YTD, with the catchy headline “Hedge Funds are Digging Gold Miners”.

WSJ Pic
 (Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: WSJ

We’ll admit their graphics are pretty chic, and with a quote from BlackRock and a Gold Fund about the Gold Miners rebounding, I’m sure more than a few people were swayed to get into Gold Miners.

“Gold companies just don’t look as expensive as they did in previous years… and you have a sentiment that is warming toward gold,” said Catherine Raw, a portfolio manager for BlackRock Inc.’s $451 million Commodity Strategies Fund. She raised her fund’s exposure to gold miners at the start of the year.”

“The industry has done a lot of belt-tightening and a lot of soul searching, and is on much firmer footing that it was two years ago,” said John Hathaway, who manages $1.6 billion at the Tocqueville Gold Fund.”

Except, here’s the thing…. It looks like there could be nothing worse for your Gold exposure than doing it via Gold Miners: 

Gold Miners Chart (Disclaimer: Past performance is not necessarily indicative of future results)

That 26% increase in GDX doesn’t look like much on this chart, and the index is currently in a 50% drawdown since the start of 2008. So much for soul searching…. As we talked about before, investing in commodity production companies isn’t easy. You not only have to determine where the commodity is going, but also if the business side is being successful at the same time.

So whether the Caddy’s mom follows Warren Buffet and switches into an investment with a little more utility, or keeps holding her Gold bars (or better yet – free up some capital by switching into Gold Futures, which you can in the graphic above track nearly exactly the same), she should beware jumping into Gold Miners, no matter what Hedge Funds are supposedly doing via the WSJ.

P.S – If you’ve ever heard the story about the Wall St. guy selling right before the Great Depression because the shoe shine boy gave him a good stock tip, that’s a type of contrarian investment where you go the other way as soon as its apparent everyone is looking at something the same. Bespoke Investment Group actually plotted such headlines (via the Drudge report) versus the market and you can see quite a contrary indicator). Along those lines, what do you guess the Gold Miners have done since their focus in the Wall Street Journal?

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

 

Asset Class Scoreboard YTD

Everyone down, now everyone back up (except you commodities…). Seems like everything has been moving in tandem of late, with everything reversing their July losses for gains in August. Except commodities, which remain the lone asset class down on the year. And meanwhile, managed futures has been hanging in there pretty well given how poor of an environment it’s been with the ultra-low volatility. {past performance is not necessarily indicative of future results}.

Asset Class ScoreboardChart Asset Class

 

(Disclaimer: past performance is not necessarily indicative of future results)
Source: All ETF performance data from Morningstar.com
Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate
Bonds = Vanguard Total Bond Market ETF (BND),
Hedge Funds= IQ Hedge Multi-Strategy Tracker ETF (QAI)
Commodities = iShares GSCI ETF (GSG); Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = iShares MSCI ACWI ex US Index Fund ETF (ACWX);
US Stocks = SPDR S&P 500 ETF (SPY)

Forget the Fed, should we be Worrying about Japan

If the Federal Reserve isn’t going to be the catalyst for interest rates finally moving higher, maybe it will be another player??  That’s the question floating around today after the Bank of Japan made an inconsistent choice (via Reuters).

“This morning, the Bank of Japan did not offer to buy JGBs under its massive asset purchase programme, as the Ministry of Finance conducted its monthly 2.4 trillion yen ($22.91 billion US dollar) 10-year JGB auction…”

The removal of the artificial demand sent Yen futures falling, and the Yen based Nikkei 225 up over 2% on the day.

JPY Nikkei(Disclaimer: Past performance is not necessarily indicative of future results)

But the more interesting action was in Japanese Bonds, which fell (rates higher), and in other world bond prices such as the US 30 yr and 10 yr. US 30yr Bond were down about -2.00% today (interest rates higher), and in a year where bond prices have done nothing but go up, that’s something.  The question, of course, is whether this is a preview of what will happen when the Fed stops bidding on US bonds.

This is only one day in the market, but the timing of the BOJ along with the return of US traders from the long holiday weekend has certainly caused an uptick in market volatility across the board. Taking a glance at the rest of the futures board today, you see that there are some other big moves today outside of bonds. Coffee up 3.4%, Lean Hogs up 1.83%, Crude down 3.12%, Wheat down 1.56%, Gold down 1.56%, and Soybeans up 0.78%.

Finviz Chart(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: Finviz

While the bond move no doubt caught many on the wrong foot (it had been trending nicely upwards, after all), this type of volatility should be a good thing if it continues into the fall. Here’s hoping.

Trade Commodities instead of ‘Invest’ in them?

Ben Carlson has been nailing it lately over in Tumblr-ville on the new Yahoo Finance Contributor network. There was him pointing out the issues with using risk adjust returns, then some stats showing even Warren Buffet has had some very big Drawdowns… (consider that all of you who pull the plug at the first sign of trouble in the alternative investment world), and the one that most caught our attention – “Are Commodities for Trading or Investing?

The commodities piece was right up our alley, being in the business, so to speak. The piece echoes some of what we said in our newsletter last year: “3 Big Reasons Commodity ETFs aren’t Getting the Job Done,” which is basically that commodity ‘investing’ doesn’t look so great when it is a “long-only“ approach (only makes money when commodities go up) because:

  1. Commodities don’t always go up (e.g. iShares GSCI ETF (GSG) -37% since inception in ’06),
  2. Even when they do, they are very volatile,
  3. Even when they do, the access points are complex and won’t necessarily provide a return equal to what the commodity did.

Carlson goes a step further, however, quoting some academic research which shows commodities actually add volatility and reduce return… not reduce volatility and add return as is supposed to be the case with a non correlated investment.

So trade commodities instead of ‘invest’ in them?

Now, some might take that to mean that commodities should be avoided, and here’s where it gets a little confusing – because the lesson from this shouldn’t be that ‘commodities’ are to be avoided and that ‘commodities’ add volatility and reduce return.  The lesson should be that Long-Only Commodities do those bad things. The lesson should be that diversification into the commodities space isn’t as simple as buying and holding those volatile commodities. The lesson might be that they are better for ‘trading’, as Carlson points out, then ‘investing’.

Trading commodities can still give you exposure to moves that have nothing to do with the stock market (like Coffee being up 71% this year or grains selling off 30% the past few months). And that’s really what having exposure to commodities is all about. It’s about gaining exposure to outlier moves in commodity markets brought about by non-financial, non economic catalysts. Like droughts and snow storms.

But not everyone wants to sit around and ‘trade’ commodities. That’s not quite a retirement plan… “I put 40% in stocks, 30% in bonds, and trade 30% in commodities”… as it would cut into your golf time quite a bit.  For those who still want the commodity exposure, but not the trading screens – the target is professional commodities traders, or registered Commodity Trading Advisors.  Now, there are thousands of such registered professionals out there – but the grand majority of them don’t actually trade in commodities, despite their name. The grand majority do systematic trading on a portfolio of markets including bond, currency, and stock index futures.

The ones which trade commodities and commodities only – are what we call Ag Traders (short for Agriculture). So while Mr. Carlson’s question seemed to be of the rhetorical type – we can actually put some data to it and compare professional commodity trading with commodity investing via ETFs. Who wins?

Investing in the ‘trading’ of commodities versus just plain ‘investing’ in commodities has won out handily over the past 9 years. [Past performance is not necessarily indicative of future results].

Ag CTAs vs Long Only Commodity ETF(Disclaimer: Past performance is not necessarily indicative of future results)
(Data= BarclayHedge Ag Traders Index, GSG = iShares GSCI Commodity Index)

For more on how these professional commodities traders operate, download our whitepaper detailing Agriculture (or Ag) Traders.

 

Who needs the USDA when you can Live Tweet Crop Conditions

What gets Ag folks excited on a Monday morning on Twitter? Live Tweeting crop conditions. All day, the people of the “2014 Pro Farmer Midwest Crop Tour,” have been tweeting their hearts out with the hashtag #PFtour14 to show the conditions of corn and soybeans across the Midwestern states.

Crop Tour Logo

The goal of this four day tour is to provide accurate information of the condition of corn and soybeans as harvest season approaches. We can’t think of a better way to do such a thing then traveling state to state live tweeting the conditions in the field in real time.

Now you might be wondering, doesn’t the USDA already collect data from around the country to provide the conditions of various crops? Yes, but this crop tour is unique in that they don’t want to focus on  yield numbers specifically, but the big picture.

“Don’t focus on yield calculations from individual fields,” says Brian Grete, Pro Farmer senior market analyst and leader of the tour’s eastern leg. “That isn’t what we are trying to do, and we actually discourage scouts from tweeting individual yield results. Instead, we look at the entire area we cover as one big corn field. Twitter is most useful for getting a general idea of what scouts are finding. And the pictures are valuable.”

Essentially, give people the opportunity to tweet about the condition of their corn with pictures, and you got yourself one heck of a trend (pun intended). Take a look at some of the pictures from the first day of the tour, via the Ohio County Journal.

Corn 1 [Read more...]

ETF Commodity Exposure YTD

Here’s our monthly look at the various commodity ETFs and how they track a simple strategy of buying December futures and rolling them annually. Plus, a comparison to Ag Traders and an overall commodity index.  C’mon futures…

(Performance as of 7/31/2014)

Commodity ETF Over/Under Performance 2014

Commodity
Futures
ETF
Difference
Crude Oil$CL_F
3.76%
$USO
2.80%
-0.96%
Brent Oil$NBZ_F
0.55%
$BNO
-2.60%
-3.16%
Natural Gas$NG_F
-7.12%
$UNG
1.98%
9.10%
Cocoa$CC_F
17.48%
$NIB
18.10%
0.62%
Coffee$KC_F
65.49%
$JO
74.52%
9.03%
Corn$ZC_F
-18.49%
$CORN
-14.94%
3.55%
Cotton$CT_F
-19.84%
$BAL
-20.85%
-1.01%
Live Cattle$LE_F
19.93%
$CATL
16.11%
-3.83%
Lean Hogs$LH_F
18.46%
$HOGS
14.24%
-4.22%
Sugar$SB_F
-3.46%
$CANE
0.50%
3.96%
Soybeans$ZS_F
-4.67%
$SOYB
-0.79%
3.88%
Wheat$ZW_F
-14.10%
$WEAT
-13.83%
0.27%
Average4.83%6.27%1.44%
Commodity Index $DBC-1.36%
Long/Short Ag Trader CTAs3.12%

(Disclaimer: past performance is not necessarily indicative of future results).
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index