Exchange-traded products (ETPs) tracking commodity futures can offer consistent returns and diversification benefits, industry experts say.
ETF Securities (ETFS) head of research and investment strategy Nicholas Brooks says: "Commodity futures returns over the past 10 years have been very strong in most cases, even including the roll yield."
Research by Vanguard shows commodity futures have experienced long periods of significant returns. From 31 August 1969 to 30 April 2009, commodity futures produced an average annual return of 9.8%, compared to 9% for US equities over the same period.
The firm says although both commodities and equities have had multiple years of returns in the 20% to 40% range, equities tend to experience higher volatility.
Vanguard also researched the potential diversification benefits offered by commodity futures. It says commodity futures returns and equity returns have historically had very low correlation, lower than that between other typical diversifiers, such as global equities.
Brooks at ETFS says investors need to use futures to gain exposure to many types of commodities, with the exception of precious metals where they can gain access to the spot price through physically backed commodity ETCs.
Brooks explains commodity ETPs track futures returns. He says the main reason for any difference in the performance of commodity ETPs and spot prices is due to the difference between futures returns and spot returns.
As a result, investors going directly into the futures market, as opposed to investing in commodities via ETPs, must contend with the same issues.
However, independent investment boutique Moonraker Fund Management says several commodity indices tracked by ETPs have significantly under-performed the underlying spot prices over the last year.
The firm attributes this underperformance to the impact of negative roll yield. This is the loss incurred when buying futures contracts in a contango market, due to higher forward prices compared with current prices.
Moonraker chief investment officer Jeremy Charlesworth says in relation to ETPs: "But the point is that many investors think they are tracking the spot prices of commodities and cannot understand where the discrepancy in performance comes from."
He adds: "Many commodity ETPs are really short term trading vehicles and investors should avoid them if they want a long term exposure to commodities as an asset class."
Conversely, Brooks at ETFS says the futures tracking ETFS Brent Oil one month have outperformed the spot price over the last 15 years, reflecting how the effects of backwardation have been stronger than contango over the longer period.
He adds: "Over the past 10 years, having commodity futures in your portfolio would have substantially boosted your overall returns."
