The time has come to talk about commodities. Chances are you don’t hold a position in this asset class, despite its low correlation with equities and bonds. And despite the fact that it’s often lauded as an inflation hedge.
If you’ve looked into commodities at all – beyond flirting with gold – then you probably walked hurriedly away murmuring, “nothing to see here” at the sight of the -60% car crash that totalled the market from 2008 to 2020.
But then came inflation – and over the next two years commodities smashed it. Gains north of 30% in 2021 and 2022 even while other assets bombed.
Are we all missing an important diversifying asset that actually does defend against inflation?
Keeping the faith
Even while investors were throwing their unwanted commodities overboard, investment academics kept at work, cracking the code of this most misunderstood of asset classes.
Were commodities really broken? Or was the recent twelve-year bear market just a completely normal case of investment risk incarnate?
As it turns out, the academic research suggests the stench of complexity and negativity hanging around commodities masks a valuable portfolio diversifier that can deliver strong long-term returns.
Which brings us to this article – the first in a Monevator mini-series to explain, demystify, and marshall the data on commodities.
Because – whisper it – this may well be the ‘alternative’ asset class many of us are searching for.
Here’s how the series will pan out:
- Part one (this piece) is a commodities explainer. Let’s see how the asset class works.
- Part two digs into the research showing the role commodities can play as a strategic diversifier.
- Part three is on the difference commodities can make to the portfolio returns of UK investors.
- Part four concentrates on commodities’ record versus UK inflation.
- Part five will scrutinise what investable commodities products are available.
Right then. On with the explainer!
What commodities investing actually means
Investing in commodities as an asset class means buying funds with exposure to raw materials such as:
- Energy products – for example oil and gas
- Staple crops – soybeans, wheat, cotton, sugar, and more
- Livestock – things that walk, like cattle and hogs
- Industrial metals – aluminium and copper and the rest
- Precious metals – gold, platinum, and other shiny stuff
An investment vehicle that tracks a mix of these categories is known as a broad commodities fund. Passive investing versions exist as commodities ETFs.
Single commodity ETCs1 exist too. But they don’t offer the same diversification benefits as a broad commodities product.
So far so good. But from here, commodities funds begin to sound like the type of financial engineering that ends with the investing equivalent of the Titanic sliding to the icy depths.
Bear with me though. There’s a strong economic rationale for commodities investing, plus a recently unearthed and impressive historical track record to support it.
Commodity futures trading
The first weirdness to dissect is that commodity funds and ETFs don’t literally own herds of cows or fleets of oil tankers. Agribusiness and oil refining is not their bag.
To avoid getting their hands dirty, they track commodity futures indexes.
Commodity futures are contracts that commit an investor to buying a quantity of a particular commodity at a specific price on a specific date. Say, two months from now.
However the investor has no notion of ever taking delivery of said commodities.
To avoid being overrun by cows, the canny commodities investor sells their futures contract before the due date. But they’ll maintain their exposure to steers or longhorns or whatever by buying into a new, longer-dated futures contract. This, too, will be sold, further down the line, as the thunder of hooves draws near.
This manoeuvre is called rolling. It means the investor, or index, continually tracks each commodity – via a chain of ever-expiring future contracts – without ever being saddled with the costs or the raw reality of buying in bulk.
Back to the futures
You might wonder why do futures even exist?
Well, commodity producers want to hedge against the possibility of adverse price movements before they’re ready to sell.
Meanwhile, buyers who actually need commodities to run their business must ensure continuity of supply.
Investors get involved in the middle because there’s money to be made in supplying liquidity to the commodity futures market.
Why commodities investing is profitable
The most counterintuitive thing you’ll discover today is that the return of a commodities futures fund or ETF has very little to do with the spot price of the underlying raw materials.
Spot price moves make up only a small component of a total return that is highly volatile but – over the long-term – only marginally less profitable than equities. And far superior to bonds.
The total returns of a broad commodities futures fund derive from three sources:
- Spot price changes
- Interest on collateral
- The roll return (related to the rolling manoeuvre mentioned above)
The spot price is simply today’s price for a barrel of oil, or a bushel of wheat, or a ton of coffee.
Interest is earned because a commodities fund diverts some of its capital into purchasing collateral that underwrites the risk taken on gaining exposure to its index.
But the roll return is the main source of long-term excess profits for investors.
The roll return is the profit (or loss) made on trading futures contracts.
Remember it’s a perpetual motion machine that constantly buys contracts with delivery dates some way off in the distance. Those self-same contracts are then sold off as D-Day looms, and are replaced by longer-dated versions.
You’ve got to roll with it
Roll return is the difference between the price earned on the sold contract and the price paid for its replacement.
If the short-dated contract is sold for a higher price than its long-dated replacement then the market for that commodity’s futures is described as being in backwardation.
If the short-dated contract is sold for a lower price than its replacement, then the market for that commodity’s futures is described as being in contango.
Backwardation good, contango bad.
A state of backwardation indicates the market expects the spot price to fall. Hence more distant contracts are cheaper than short-dated ones, and an investor should make a positive roll return when selling and replacing the maturing contract.
A state of contango indicates the market expects the spot price to rise. Now we’re in the reverse situation and facing a negative roll return when the short-dated contract is replaced with a more expensive one.
Individual commodity futures markets flip between the two conditions depending on supply and demand.2
From our perspective, the important point is that commodity investment returns benefit from backwardation and are dragged down by contango.
These states can last for long periods. The atrocious returns of commodity funds post-2007 was often linked to contango in the oil market for years after the Global Financial Crisis.
However while individual commodity futures markets are highly volatile, they also enjoy low correlations with each other.
This enables diversified commodity funds to descend into the broad commodities market like claw-craned arcade grabbers.
The claw retracts clutching handfuls of winners and losers but, over time, the gains provide ample compensation for investors.
Commodities investing: the underlying rationale
There are two competing theories that seek to explain why commodities investing is profitable.
The first is the theory of normal backwardation, attributed to John Maynard Keynes.
Commodity producers want to lock in a minimum price to insure themselves against a dramatic drop in the value of their output, say at harvest time.
Thus producers hedge against the possibility of loss by selling futures contracts to investors. They pledge their product for a price that could be lower than the one they’d receive if they waited until delivery day.
Investors expect to be rewarded for offering this insurance and for taking on the risk that they may be overpaying for the commodities. Thus they set the futures price below the spot price they expect to prevail when the contract matures.
If the investor has made a shrewd guess then they can theoretically sell the commodities for a profit.
Although in reality, as discussed, they’ll punt the contract to a buyer who genuinely wants the goods. All being well, the investor still pockets a tidy profit as the value of the maturing futures contract converges upon the spot price.
The second rationale for commodities investing is known as the theory of storage.
In this conception, the value of short-dated futures is bid up by commodity buyers who cannot risk their production line slowing down for want of raw materials.
Once again, investors benefit if they’re able to purchase long-dated contracts for a relatively low cost, and then later cash in, when buyers flood into the market like forgetful husbands who’ll pay stupid prices for flowers come Valentine’s Day.
Wake up and smell the coffee, the crude oil, and the hogs
These theories help explain why a long-term risk premium should exist for commodities futures – making them more profitable than sitting in cash.
Without the promise of that premium return, there’d be no reason for investors to create the market. Eventually it would dry up.
But theory is not enough. We rational investors want to see it backed up by a historical track record of positive results.
It turns out there is one. That will be the topic of my next commodities post.
Take it steady,
The Accumulator
Thanks for this post which is really interesting. I have just one question – is there an ESG version of exchange traded commodities?
As well as a passive investor, I am a bunny-hugging, yoghurt-weaving, vegetarian environmentalist. I would like to avoid some of the commodities mentioned, such as cattle, though I did find the image of herds of steers descending on offices amusing, and would like to avoid oil too. Does this leave me with somewhere to go? windfarm electricity? Sustainably produced soya? I’d be glad to learn more.
Super interesting article about something I didn’t think I needed to know about. Looking forward to the rest of the series.
But you made up backwardation and contango though, right? Finance jargon is bonkers.
Sounds like a great series. I wonder if you could include your thoughts on the pros/cons of including mining company equity alongside the metals themselves? For example, iShares MSCI Global Gold Miners ETF | RING. Thanks!
Owain,
You are either a passive investor or one that expresses their views via their investing, can’t be both.
If you are the latter and have an environmental agenda, may I suggest that avoiding oil ETPs will hinder your goals. What you probably want to do instead is be overweight Oil futures or ETPs, thus on the margin driving oil price up, which on the margin decreases demand and therefore oil consumption.
Came here to find Owain had already asked my question for me, and already had an interesting reply!
I feel ill-at-ease with the tension between my personal beliefs and the way I express them in the day to day (veganism, no flying, active transport, fossil fuel replacement where there’s an affordable alternative) and my passive investment strategy. Because I agree that when you start making adjustments to invest only in certain types of markets, that is moving towards an active profile, and I don’t have the time, knowledge, or risk appetite for an active approach.
Now, I haven’t sweated this very much to date, having not much actual capital to manage, but as the numbers tick up it’s starting to be a less-ignorable sore point. It increases my inclination towards ‘dump most money into housing’, because I can measurably affect the ongoing environmental impact of that asset (i.e. I know how to DIY and buy in energy use improvements.)
It’s intriguing that when read this article there’s something more visceral about linking to an actual named undesired commodity, which increases the ‘ick!’ factor beyond the point of ‘sure, I can throw some money passively into this now and hope the impacts are sufficiently diffuse.’ I suspect this difference in reaction vs. passive indexing may be irrational, but it still makes it hard to want to invest here.
I’m looking forward to the rest of this series!
Excellent. I’ve been waiting for this series of articles for years. As the name suggests i’m slightly biased towards one particular commodity, but they’re all fascinating when you start delving into them. For some reason, i’ve always wanted to trade some ‘lean hogs’, but never quite got the confidence to take the plunge. And for anyone who likes a good finance drama, Cuddles and the Essex oil traders was a great story.
> is there an ESG version of exchange traded commodities?
I have difficulty imagining a situation where ESG and commodities work together in the same sentence 😉
Commodities tend to be extractive, and often dirty. Mining anything doesn’t usually go with ESG
+1 to TA for the visual depiction of backwardation and contango!
Last year there was an article in the Financial Times titled “ Commodity ETF providers aim for green niche”.
I can’t see anything convincing on commodities integrating ESG principles into investment products. There’s a piece here that indulges in some mental gymnastics:
“Futures do not affect consumption or production – they affect exposure to risk, and these are fundamentally different.”
https://caia.org/blog/2022/01/11/commodity-futures-and-esg
HanETF have an ETC that apparently tracks the EU’s carbon trading scheme:
https://www.hanetf.com/product/30/fund/sparkchange-physical-carbon-eua-etc
And a responsibly sourced gold ETC!
https://www.hanetf.com/product/7/fund/the-royal-mint-responsibly-sourced-physical-gold-etc
@ Mr Slow – good idea. I’ve had a post along these lines on the back-burner for ages. About time to get it done, I think.
I am pretty skeptical of the utility of boycotting / ex-ing out holdings of particular companies from an ESG perspective (whilst, contrarily and with full cognitive dissonance, doing it myself by never investing in tobacco stocks 🙂 ).
But I’m twice as skeptical when it comes to commodities.
There is no way that anybody reading this is not using a slew of commodities every single day / week / year. Unless you’re a gazillionaire, the impact of this consumption will dwarf any marginal impact by you choosing not to put 5% into a commodity fund or mining stock, I’d suggest?
Note I say this as somebody who includes a section of Environmental Links into my Weekend Reading every week (show me another financial blog that does that 🙂 ) and who is fully on-board with the climate emergency, bio-diversity dangers, etc.
But I think that’s really best expressed through personal consumer choices etc (and of course at the ballot box / protesting and campaigning etc).
Yes that’s still marginal, but to me it feels more intellectual coherent and worth the candle then boycotting futures on wheat or copper while consuming both daily.
Not trying to change anyone’s mind, I can see how others feel differently. Just throwing it in the mix for thought. 🙂
@TA Thank you for this excellent and informative piece.
For the first time, I now think that I properly understand how roll can deliver a potentially sustainable and persistent source of return.
Whilst I have read several accounts of backwardation and contango over the years, yours is the first and only to take the time and the trouble to explain them fully; and you’ve done so here in such practical and clear terms, explaining effectively when doing so why they are important for a systematic investing framework.
I’d held a broad commodities fund for a few years in the 2010s, when the asset class looked to be historically undervalued on a relative basis, and figured ‘mean reversion’ and diversification benefits.
But it was going nowhere and with no dividends, and so I sold it for more VWRL.
Now that I understand how there can be a potentially enduring return from roll; I think I also, for the first time, understand why that decision to bail on commodities may have been a mistake prospectively, from the point of view of an investment framework, as well as retrospectively, in terms of asset timing.
@TII. Just be careful not to fall into the trap of thinking “contago = bad and backwardation = good”.
The key to generating a systematic return is that the current price for forward/future price at time t, F(t), deviates from the expected spot price at time t, E(S(t)). So normal backwardation can occur in both backwardated and contago markets. It’s really the difference in E(S(t) vs. F(t) that matters. It’s clearly feels easier to hold the position in a backwardated market since you have positive slide return as the future rolls up the term structure but that slide may not be (and often isn’t) realized.
The forward price F(t) and spot price S(t) should be related by the cost of carry. Else an arbitrage condition exists, which is not impossible tbh but isn’t the same source of return that we are discussing from normal backwardation.
As an aside this type of behaviour is seen in any market where there is substantial forward hedging of risk. Examples being the FRA/interest rate swap market or fx forward/swap market. These are very liquid markets but the tension between hedgers and speculators (ok investors if you want) can create systematic risk premia to be exploited. It’s makes them rather different from equity markets.
Just to nit pick a little, contango/backwardation is a function of the forward price of the underlying relative to the futures price. So if you have a spot price of 100, risk free rate of 6%, then the 1 month forward would be around 100.5, 2 month 101, etc. If the 1 month future is trading at 100.75 it would be in contango, at 100.25 in backwardation. It is perfectly possible for a market to have some expiries in contango and others in backwardation!
Although markets (expiries) can be in backwardation, most of the time they are in contango, reflecting the cost of storage. If that were not the case it would be very easy for market participants to make risk free returns by holding the commodity and shorting the future.
I completely agree that commodity futures (and options) provide a source of return for those willing to provide “insurance”. What I am sceptical about is whether much of that source of return is available to retail investors in the way it is in equity and bond markets. To make a passive return, investors need as little as possible of the return to be creamed off by middlemen. I am open minded about it though, so will read future articles with interest. One thing you might like to touch on are the high tail risks associated with commodities. It was not that long ago that WTI oil futures went below zero…
@ZXSpectrum48k and @Naeclue: thank you both for explaining and elaborating on the operating mechanics of these contracts.
The E(S(t)) vs. F(t) framework for commodities roll is particularly helpful here, and the worked example was also much appreciated.
I find that it takes me some thinking to get my head around this futures’ stuff!
Fwiw, I’d just like to add my +1 to @ZXSpectrum48k and @Naeclue. I spent the vast part of my 20 years working in commodities and it really isn’t as simple as contango = bad, backwardation = good. There are ways to make (and lose!) money in both scenarios – and as Naeclue points out, the forward curves aren’t always that straightforward! Not to mention liquidity risk and being forced to hold to expiry.
There’s a reason all the big players make more money when they have physical assets they can trade around and it’s a huge advantage over the financial instrument only players. Fundamental ‘rules’ can and have been broken – which catches out people trading only from theoretical financial models that aren’t built to deal with it.
In short, it’s a fascinating topic and I look forward to the rest with much interest! Cheers!
@ Michelle & ZX – I get where you’re coming from about the danger of oversimplification but the line isn’t meant to suggest that backwardation automatically means happy days and contango spells inevitable doom. As I reread the article just before publication, I realised that it still wasn’t necessarily clear that contango was a headwind and backwardation a tailwind, so I added that line to try and defuse the complexity. The line wasn’t intended to be read as that’s the entire story game, set and match. I’ve read any number of papers showing that broad commodity future index returns generally (but not always) suffer during periods of contango and are typically better (but not always) during backwardation, so I’m happy with my headwind / tailwind analogy. I’m even happy to change the line to that language if my original intention is being lost through lack of nuance. With an explainer it’s always a struggle to strike the right balance between sketching the main battle lines vs getting hopelessly lost in the complexity.
Anyway, just to be double clear that I’m not having a pop – I’m very glad you’re expanding on the topic in the comments which I think is all to the good. And as I say, I can see the usefulness of modifying the language if “backwardation, good, contango, bad” just seems too definite.
“the roll return is the main source of long-term excess profits”
I am very surprised to hear that and would have thought the roll return would detract from long term returns. Hopefully the evidence will be revealed in part 2?
@ Naeclue – for more on the decomposition of returns I recommend checking out the ‘Commodities for the Long Run’ paper and DMS’s commodities chapter in the Global Investment Returns Yearbook 2023. I’ll be focussing on total returns in the rest of the series.
The reason I don’t invest in commodities is that, for those with no forecasting ability, it only makes sense if there is a risk premium. Although there may have been one historically, I just don’t know how to tell if there is still one now. For corporate bonds I can look at spreads and consider expected defaults, for equities I can use a discounted dividend model but for commodities the calculations are too complex for me. Yes in the long run there might be an insurance risk premium (if the number of hedging producers exceed hedging consumers) but if at the moment a load of investors have gone long commodities futures that premium could well have gone negative.
Just to say I too would welcome any further contributions from our house experts on these sorts of securities. @TA is a champ for bringing this to the table, and having had a sneak preview of part two in my editing I am very much looking forward to the future parts to learn how I might add say a 5% allocation to my portfolio. He’s convinced me!
But… it’s equally true this is off-beat for both of us. The DMS chapter (and research cited) in that CS Yearbook 2023 is overall compelling, but there’s some nuance that may have gone a bit over my head from a skim read, so again very happy to learn from all who know this field better (which in my case is anyone who has operated in the commodities / practical futures field at all 😉 )
For people who want to understand risk premia in Commodities at a broad level, I could recommend Expected Returns (2011) and Investing Amid Low Expected Returns (2022) by Antii Illmanen.
I worked with Antii early in my career. I don’t agree with all his views but he has fairly encyclopedic knowledge in the area of investment returns by different asset classes.
@ZXSpectrum48K — Cheers for the suggestion, Illmanen looks an interesting read. It’s about time I did some proper homework. Though from the Amazon precis it feels like he could already benefit from doing an update, given rates at 5% etc.
Anyway on a less-than-exhaustive Google it seems he’s in line with what @TA has found re: commodities:
We find that our diversified backet of commodities has returned 4% annualised real over time. This finding is consistent with other studies such as ‘Commodities for the Long Run’ (Levine et al., 2018) and those reported in chapter 4 of Antti Ilmanen’s ‘Investing Amid Low Expected Returns’ (2022). It is interesting to note, in passing, that without regular rebalancing this return is lower, as individual commodities typically compound lower returns over time.
There are considerable variations in commodities’ return by economic regime, with the best results during Inflation, and the worst in Deflation.
https://www.man.com/maninstitute/road-ahead-stick-with-commodities
Hey both. No worries on my part – it’s a fascinating topic and not one often covered, so enjoying it – even if it does remind me of working!
I’m defn coming at it from the practical side. Started with power/coal, moved into gas/LNG, a stint with global oil before ending up in renewables – prob my favourite for personal reasons but a tough gig at an oil/gas company! Each market has it’s own peculiarities/opportunities, that’s what makes it so interesting. Be warned, it can be a rabbit hole….!
There is much you can read but you are right, a lot is often out-dated. I do remember our quants often getting upset when the real world wasn’t doing what it was ‘supposed’ to . Negative prices were a favourite – most models broke the first time that happened! I’ve never been much good/interested at book/paper learning so no recommendations but looks like you have plenty of experts to provide that already.
Enjoy – and thanks for bringing up old memories ?!?
Very interesting topic. I have long subscribed to the idea that commodities are a good way to diversify the portfolio and hedge inflation. The problem is how to invest, in practice. I landed on commodity stocks, which is a poor substitute in many ways.
But I couldn’t quite convince myself that commodity futures ETFs are investable.
– They diverge wildly from the underlying index, and often perform worse
– They roll their contracts in a predictable way so that active investors can front-run them
– Roll yield (or loss) is a major factor, and I do not understand how the switch between contango and backwardation is related to the macro regime.
One thing is quite clear, during disinflation commodity futures behave like crappy stocks, and during inflation they shine.
– It wasn’t clear to me if “roll-yield optimised” ETFs work or are a marketing gimmick.
Perhaps this is an area where finding a good active fund is the way to go.
Looking forward to the next article!
@Sparschwein. I’d argue that the roll return being the dominant driver of returns is not incorrect but perhaps back to front in terms of logic. Instead I’d argue that when the macro regime changes, so that inflation is rising more than expected, that spot rises quickly but the market typically assumes is that price will eventually mean-revert, so the forwards move less. Hence the term structure flatten/inverts. Hence we more often see backwardation in the curve. When inflation is falling more than expected, conversely we get a steeper curve and we see more contango term structures.
Nonetheless, in a rising inflation regime, contango curves can still produce positive returns on average. While in a falling regime, backwardated curves can produce negative returns.
All of the above needs to taken as a very generic concept; the specifics are rather more involved. Moreover, there is clear market segmentation effect between spot (physical) and front future since many market participants cannot trade the physical, they can only trade futures.
I’d also note the very small size of the commodities futures market. It’s less than $1 trillion (I might be wrong by a factor here but it’s not $10 trillion).
@ZXSpectrum48k: thanks for suggesting
Illmanen. I’ll be adding those books to the Christmas wishlist.
With any potential source of return which is subject to issues over complexity, and also to both significant uncertainty and to disagreements (amongst academics and practitioners) about whether the return exists at all, its origins and it’s magnitude; it is perhaps prudent to apply a mental discount to any assessment of the likelihood of the return turning up as and when needed, or at all; and the likely future size of the expected return.
I’d skimmed over some of what were the then current SSRN papers on Commodities as diversifiers before briefly owning a broad commodities ETF in the mid 2010s; and it did seem then that it was a complicated and contested area giving rise to divergent views, with some academics arguing at cross-purposes to each other and perhaps not much focus on how a (small UK retail) investor could actually make use the info.
At least Commodities didn’t seem to arose quite the passions around the relative merits and demerits of holding it in different portfolios for different purposes and timescales as seemed to be the case with Gold (where views were typically very polarised between those who agreed with Keynes’ ‘barbarous relic’ verdict and those who were out and out goldbugs).
Where I could see broad Commodities having a particular attraction is for those investors who are actively looking for a DIY multi asset portfolio which is designed to be ‘all weather’, even if that might be at the price of some returns as compared to Equities (e.g. something like Harry Browne’s Permanent Portfolio, but with broad Commodities substituting for some of the allocation to Gold for protection from unexpected inflation).
Having said that, whilst the likes of Peter Spiller at CGT invest in commodities alongside discounted ITs, Prefs, Linkers, conventional bonds and cash; he and his competitors over at Ruffer, Troy, PAT and RCP seem to view commodities less of permanent portfolio element than a reversionary bet on future prices.
I’ve just read this and some of the threads. I mainly invest in vwrl(global equity) and lifestrategy 100 . This is because they are businesses and I basically understand them. I am sure there is some commodity exposure there.
It would take me hours of reading to understand these articles.
I am not sure if investing directly in commodities would be a great idea for the average (or below average in my case) investor. Just because it is difficult to understand.
Thanks @sohan1631236.
One concern about leaving commodities out altogether, and going with a pure equity exposure (which has been my own personal default allocation to date), is the absence then of any specific protection from either:
a) unexpectedly high and/or persistent inflation (as expected inflation or deflation, and expected reflation or disinflation should, by definition, be already priced in); and,
b) any unexpected changes in interest rates associated with it (which adversely effects the discount rate on future expected cash flows for more growth oriented companies, and makes the existing dividend on more value type companies less attractive on a relative basis).
What isn’t clear to me yet is whether alternatives like commodities (and/or commodity companies), gold (and/or gold miners), REITs, utility and infrastructure stocks, index linked gilts (or TIPS) etc. actually (whether individually or in combination) can provide both a comparable (i.e. not much less) total long term return to a Global equity tracker and a decent measure of protection from unexpected changes in inflation and interest rates.
@ Sohan – I agree that commodities are something of a blank area on the map. I’ve been reading about them for years and haven’t felt confident enough to invest. But then we’ve just come through one of the all-time bear markets in commodities which may well have had something to do with that.
What’s changed for me now is being able to examine the long-run data which I’ll go through in the next few posts, and having read some of the more recent academic work which helps explain how the asset class works. I’ll cite those papers as we go.
From what I’ve read, commodities stocks do not replicate the behaviour of commodities futures.
They’re more correlated to the stock market in general – which is the same problem that affects public REITs vs private property when trying to access the diversifying qualities of real estate.
@ZX – thank you for the explanation. Something to mull over. Do you invest in commodities, and if so, how?
@TA – from what I read some years ago, neither commodity stocks nor futures funds replicate commodity prices well. Bernstein shows in “Rational Expectations” that from 2005 – 2012 the spot index more than doubled and the corresponding futures returned zero. He concluded that stocks of commodity producers were the better choice. He also showed that commodity stocks did significantly better than the overall stock market during inflationary periods. This has worked out rather well for me in last year’s downturn. I would be interesting to see the comparison with futures ETFs.
Commodity stocks do have on average a high correlation with the stock market ofc, and that’s a big disadvantage.
Joachim Klement’s just covered the effect of financialisation on commodity futures and related strategies. Interesting take:
https://klementoninvesting.substack.com/p/when-investors-ruin-a-great-asset