I have a complicated question. I heard that with commodities, you can only own a commodities futures fund, and that you lose money because of the negative roll yield. I don’t understand this exactly. I was wondering if it is better to invest in etfs that own commodity companies.
I have shares in the Vanguard Commodity Strategy Admiral fund. Performance year-to-date is 28.83 percent according to Morningstar. That might be a possibility for you. There are also commodity ETFs, such as DBC (performance YTD 32.48%) and PDBC (No K-1 ETF; YTD performance 32.65%).
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I’ll explain it this way. Is it better to buy nanr or dbc. nanr buys companies that deal with commodities.
It is impossible to provide a single dictum that applies in all economic circumstances, unfortunately. While it is the case that a commodity fund must pay fees to futures contracts roll-forwards, there are also certain expenses that can rise substantially in commodity businesses which may far outweigh futures roll-forwards. Those expenses will manifest in the spread between the two asset spreads if you examine their correlation, which you’ll notice is subject to change. To take a simpler example of the commodity fund versus commodity business conundrum, examine the price action of a gold futures exchange traded note (GLD) to a gold mining index fund (GDX). You’ll notice there is a general correlation, but the spread expands and contracts contingent upon the contango or backwardation of gold futures contracts, inflation in equipment to gold mining, etc…
Where I thought you were going with this, and what I wanted to emphasize to you if you were, is there are substantial advantages to buying the commodity futures yourself rather than buying the funds that buy the futures for you --i.e. buying /gc contracts rather than the GLD exchange traded note. The advantage to buying the futures yourself is you are taxed 60% long term and 40% short term regardless of how long you own the contracts. Of note, this pertains also to non-commodity futures, such as S&P 500 e-mini contracts (/es). The primary disadvantage to this approach is you must roll the futures prior to expiry yourself, but the tax advantage more than makes up for the straight-forward process of rolling the futures contracts forward.
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Thanks. I think you are probably right, but buying futures myself is too complicated for me. As Warren Buffet says, stay in your circle of competence.
You gave a very good explanation.
I was wondering if it is better to invest in etfs that own commodity companies.
My two cents:
Yes, it’s better to own ETFs than commodities.
It’s much better to own commodity extraction companies individually rather than in an ETF.
And it’s better to own NON commodity producing companies instead of commodity companies.
The reason the company is better than the commodity is because, in a regime of flat commodity prices, the company can make money but the commodity itself can’t.
The reason almost any other kind of company is better is that commodity companies have zero control over the pricing of their product.
That’s pretty much the definition of a commodity product.
They get blindsided by moves in the market, so their shareholders do too.
A whole lot of very rich, very smart people–including the hedging departments at the commodity firms who have excellent information–try to predict commodity prices.
If you don’t have a good reason to believe you’re better at it than they are at those predictions, invest in something more likely to make a profit.
Just a suggestion : )
Jim
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Jim,thanks for the explanation. I have a follow-up question. Right now most stocks are are declining in value to dollars. In addition, dollars are declining in value relative to commodities.
Doesn’t it make financial sense at this point in the markets to exchange dollars for commodities? It’s a double win. You win against the declining value of stocks, and the declining value of dollars.
You could hold dollars, but they’re declining in value, just not as rapidly as stocks. Another alternative is to sell another currency that is declining in value more rapidly than dollars, such as JPY and GBP.
Doesn’t it make financial sense at this point in the markets to exchange dollars for commodities? It’s a double win. You win against the declining value of stocks, and the declining value of dollars.
Past performance is a poor prediction of the future.
Elan
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I though past performance was the basis for mechanical investing? Back testing is conducted to determine what performed best in the past, and on that basis stocks are selected in the hope that what worked in the past will work in the future.
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I though past performance was the basis for mechanical investing? Back testing is conducted to determine what performed best in the past, and on that basis stocks are selected in the hope that what worked in the past will work in the future.
Then show a backtest. Saying that the stock market has dropped recently, or that certain currencies have dropped recently, is not a backtest.
Elan
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Jim wrote:
It’s much better to own commodity extraction companies individually rather than in an ETF.
And it’s better to own NON commodity producing companies instead of commodity companies.
The reason almost any other kind of company is better is that commodity companies have zero control over the pricing of their product.
My understanding is that the the recent rise in energy prices stems from a combination of demand and supply factors : increased demand due to urbanization around the globe + monetary and fiscal stimulus; reduced supply due to a multi-year trend of lower capex spending by energy companies. In that way perhaps they have some ability to control prices.
Bigger question. If these companies make relatively poor investments - and Im not challening that notion - why do you think Mr Buffet been backing up the truck on CVX and Oxy?
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Building on Jim’s points, Here’s some other articles recommending staying away from direct commodity investing.
The Worst “Investment” Ever?
www.servowealth.com/resources/articles/worst-investment-ever… ( July 2015)
Josh Brown (reformedbroker) @RitholzWealth
We don’t include commodities or “real assets” in our strategic asset allocation model portfolios although many advisors do, including the robo-advisors. This is not because we dislike them or disrespect their ability to add diversification. It’s mainly because of these three common-sense notions:
a) they are unnecessary in small amounts (a 3 percent commodity allocation sleeve? Who are you f***ing kidding?) and dangerous in large amounts. We’re not here to speculate on commodity prices. We’re here to keep rich people from becoming poor people. History suggests that, as with gold, you win sometimes and you lose sometimes but the whole gambit is unnecessary.
b) the commodity producers are publicly traded and represented in the equity opportunity set. In foreign markets, they are a bigger slice of the pie than in US markets. For example, the UK, Australian, Mexican, Brazilian and Canadian stock markets are lousy with materials companies and miners. If we’re getting industry exposure in our global equity portfolios, we don’t also need a constant-contract futures bet on top of it.
c) commodities as an investment are basically a weak dollar bet. There are plenty of other weak dollar bets embedded in our global portfolio as it is.
But back to the price action, which I find fascinating as a student of markets…
Here’s what will happen: Commodities will one day (maybe soon) get so oversold and universally despised that they will stage a massive comeback. Or maybe it will be a dead cat bounce on the way to lower lows. Some traders will absolutely clean up by being positioned perfectly. Most will get their asses handed to them, especially the pretenders that couldn’t tell a soy bean from a coffee bean and have no business being there.
Me, I’ll just watch and enjoy the show.
Info on other ETFS -
For investors reluctant to use leverage. PowerShares DB Oil Fund (DBO) is a crude oil futures ETF that does not use leverage. It is a long crude oil ETF but investors can just short the ETF to be on the decline in oil price. PowerShares DB Energy Fund (DBE) is a more diversified basket commodity ETF that invest in a variety of energy futures from WTI (22.5%), heating oil (22.5%), brent crude oil (22.5%), RBOB gasoline (22.5%) and natural gas (10%). This can be a good option for those that want exposure across a spectrum of energy future commodities. PowerShares also have a long, short and double short crude oil ETNs. However these never reached scale to be viable for investors to use. It does not have any leverage 3x oil ETFs.
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There are also managed futures funds, which can be long or short commodities, so they benefit from price movement as we are seeing now, whether it is long crude oil and natural gas or short bonds and the yen. These kind of funds are not affected by negative roll yield and are not dependent on commodities moving higher in order to make money.
I own DBMF currently.
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There are also managed futures funds, which can be long or short commodities, so they benefit from price movement as we are seeing now, whether it is long crude oil and natural gas or short bonds and the yen. These kind of funds are not affected by negative roll yield and are not dependent on commodities moving higher in order to make money.
I own DBMF currently.
**Compare Commodity ETF's**
**Sorted by YTD COMT PDBC DBC CMDY DBMF**
Market Price $41.55 $18.65 $27.53 $63.40 $31.62
4/29/2022 16:15 4/29/2022 16:15 4/29/2022 16:10 4/29/2022 16:10 4/29/2022 16:10
Price Performance (Today) -0.91% -0.69% -0.76% -0.66% -0.30%
4/29/2022 16:15 4/29/2022 16:15 4/29/2022 16:10 4/29/2022 16:10 4/29/2022 16:10
Price Performance (Last 5 Days) 0.83% 1.47% 1.40% -0.13% 1.54%
4/29/2022 4/29/2022 4/29/2022 4/29/2022 4/29/2022
Price Performance (Last 4 Wk) 3.64% 5.31% 4.96% 3.01% 9.60%
4/29/2022 4/29/2022 4/29/2022 4/29/2022 4/29/2022
Price Performance (Last 13 Wk) 24.48% 23.18% 23.23% 19.19% 20.46%
4/29/2022 4/29/2022 4/29/2022 4/29/2022 4/29/2022
**Price Performance (YTD) 34.55% 32.65% 32.48% 28.13% 22.57%**
4/29/2022 4/29/2022 4/29/2022 4/29/2022 4/29/2022
Performance (Last 1 Wk / 4 Wk) -0.77 -0.72 -0.72 -1.04 -0.84
4/29/2022 4/29/2022 4/29/2022 4/29/2022 4/29/2022
Performance (Last 4 Wk/13 Wk) -0.85% -0.77% -0.79% -0.84% -0.53%
4/29/2022 4/29/2022 4/29/2022 4/29/2022 4/29/2022
**Net Expense Ratio** 0.48% 0.62% **0.85%** 0.28% **0.85%**
**Schedule K-1** No No **Yes** No No
**Asset Class Commodity Commodity Commodity Commodity Equity**
**Strategy DYNAMIC ROLL DIVERSIFIED INDEX SELECT BROAD MANAGED FUTURES**
GD_
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Yes, these long only commodity funds have done well YTD. With the commodity sell off this morning, these funds are trading down 1.5-2%. I prefer an all weather fund that benefits from both the ups and downs of commodity price movements.
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