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By Brad Zigler

It's that time of year again: time to look back upon the now-ebbing 2009 and assess its best and worst performers.

All in all, it was actually a pretty good year for commodities. Better for some, certainly, than for others, but let's not forget that the preceding year was an especially rough one for commodity investors.

Note that I said investors, not traders. The buy-and-hold approach to commodities in 2009 was a bit of a mixed bag. Buy-and-hold isn't something most commodity account holders can reasonably do, given the margins employed in futures trading, although long-term holds are possible for investors in grantor trusts, exchange-traded funds and exchange-traded notes.

(A quick refresher on the different structures: A grantor trust is a custody account into which an asset, such as precious metal, is deposited; pro-rata shares in the account are then sold to investors as limited partnership interests. An exchange-traded fund (ETF) is a portfolio of securities or futures held for the benefit of shareholders, akin to a mutual fund. An exchange-traded note (ETN) represents a financial institution's debt, obliging the bank to adjust the note's maturity value by the degree of change in a specified index.)

Trusts, Funds And Notes: Behind The Returns

With these different methods of "owning" commodities, there are bound to be differences in the returns engendered. By and large, grantor trusts will provide the closet thing to holding actual commodities, because that's in fact what the trust actually does: Physical assets are deposited, rather than futures or stocks. Differences between the return earned by the actual commodity and that of the interests in a grantor trust more than likely result from the trust's expenses (in the case of precious metals trusts, gold or silver is sold to finance storage, insurance and custodial fees).

In addition, there may be an apparent error between the trust's actual net asset value and its share price. But it's important to remember that transactions printed on the tape (or seen scrolling by on CNBC or Bloomberg TV) are "last sale" prices, not the current bid or ask. If the midpoint between the current bid and ask—refreshed at least every 15 seconds—is used as a reference point, the error is usually negligible.

For exchange-traded funds, however, tracking error can sometimes be significant. Largely, it's a timing issue. Most of the time, a considerable difference between the last sale price and a fund's end-of-day net asset value or its intraday indicative value can be attributed to a relative infrequency of trades in the security, although tracking error can also result from the product's index methodology or the portfolio's management.

There'll naturally be a difference between the return earned by a futures-based fund and a cash commodity, because futures' inherent pricing conventions ("contango" and "backwardation") produce incremental yields (negative and positive, respectively, for long-only portfolios). In addition, a fund's manager may not be able to exactly replicate—in timing or size—the fund's benchmark index. There are also transaction costs and expenses borne by the portfolio—commissions, bid/ask spreads, etc.—that aren't embedded in an index.

An exchange-traded note will not be subject to index tracking error, since there is no actual portfolio being managed. No portfolio means no frictional transaction costs. Contango or backwardation, however, will still be reflected in the note's return, so there may be an apparent spread between the underlying commodity's spot return and that of the notes. By far, however, the most significant error between a note's return and that of its underlying commodity comes back to liquidity; ETN turnover can often be quite small, so the last sale could be quite stale, especially for those tracking more volatile commodities.

The Good, The Bad And The Ugly

So what commodities did well in 2009—and which ones did not?

To answer that question, let's look at those commodities that offered investors and traders the greatest choice: the ones serving as a basis both for domestically traded futures and exchange-traded products. To make direct comparisons possible, we'll focus on a dozen single commodities, rather than sectors.

Gold

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

GCZ9

Future

$1,097.00/oz.

23.2%

Contango

GLD

Grantor Trust

$107.47

24.2%

IAU

Grantor Trust

$107.54

24.1%

DGL

ETF

$39.36

22.5%

UBG

ETN

$30.16

23.2%

The four exchange-traded gold securities are fairly actively traded, so there's little disparity between their returns. Greater difference will be noted in the products based upon the less active silver market:

Silver

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

SIZ9

Future

$17.091/oz.

50.8%

Contango

SLV

Grantor Trust

$16.81

50.1%

DBS

ETF

$30.55

49.3%

USV

ETN

$24.82

58.7%

Here, the effect of contango is clearly reflected in the lower return of the PowerShares DB Silver Fund (NYSEARCA:DBS), while the slow turnover in the UBS E-TRACS CMCI Silver ETN (NYSEARCA:USV) seems to exaggerate its return.

Still, silver futures earned the third-best return in our 2009 universe, while gold lagged behind in ninth place.

Platinum

Product

Type

29-Dec-09

Market Price

Apparent

Profit/Loss*

Market

Condition

PLF0

Future

$1,467.00/oz.

24.0%

Contango

PGM

ETN

$38.45

34.7%

PTM

ETN

$18.21

28.2%

*Platinum products' performance marked from 07-Apr-09, the listing date of Jan. '10 platinum futures.

The other precious metal in the field, platinum, could only be tracked for three-quarters of the year, as its futures aren't listed very far in advance of delivery. The return on platinum futures earned it a spot just ahead of gold, but the apparent returns of platinum exchange-traded notes bested futures, due to roll-optimizing methodology and plain old timing error.

Copper

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

HGZ9

Future

$3.296/lb.

129.2%

Contango

JJC

ETN

$45.22

130.6%

The standout top performer for 2009 was copper, which more than doubled its value in futures as well as the iPath Dow Jones-UBS Copper Sub-Index ETN (NYSEARCA:JJC), due to high average trading volume.

Crude Oil

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

CLG0

Future

$78.87/bbl.

30.9%

Contango

USO

ETF

$38.84

32.9%

USL

ETF

$40.27

38.5%

DBO

ETF

$27.39

38.8%

OIL

ETN

$25.60

31.4%

Crude oil investors have lots of choices; they can trade futures or establish positions in a relative multitude of funds and notes. All those listed in the table are actively traded, so the variances in returns have more to do with index methodology than liquidity. Both the United States 12-Month Oil Fund (NYSEARCA:USL) and the PowerShares DB Oil Fund (NYSEARCA:DBO), for example, utilize contango-thwarting roll strategies to maximize returns.

RBOB Gasoline

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

RBF0

Future

$2.0106/gal.

53.0%

Contango

UGA

ETF

$35.92

84.6%

Volatility in gasoline's market conditions—which alternated between contango and backwardation—allowed the United States Gasoline Fund (NYSEARCA:UGA) to greatly outperform a yearlong hold in RBOB futures, the fourth-best performer in our universe.

Heating Oil

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

HOF0

Future

$2.1028/gal.

21.5%

Contango

UHN

ETF

$27.60

27.4%

Meanwhile, heating oil futures plodded along to a tenth-place finish, as there were fewer opportunities for positive rolls in the heating oil market in 2009.

Natural Gas

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

NGG0

Future

$5.84/mmBTU

-21.1%

Transition

UNG

ETF

$10.58

-54.3%

GAZ

ETN

$15.09

-48.4%

Rounding out the energy sector is natural gas, the worst performer of 2009. Still, it may yet shape up to be one of 2010's stars. Most of the year natural gas languished in contango, which exacerbated losses in the gas-based exchange-traded products, but the market is now inverting from contango to backwardation.

Sugar

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

SBH0

Future

26.79¢/lb.

90.1%

Backwardation

SGG

ETN

$75.29

85.5%

Among foods, sugar was 2009's star, spending most of the year in inversion. The iPath Dow Jones-UBS Sugar Sub-Index ETN (NYSEARCA:SGG) fairly well followed suit, returnwise, despite its sometimes thinly traded market.

Cocoa

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

CCH0

Future

$3,237/tonne

26.6%

Contango*

NIB

ETN

$48.55

16.8%

*Old crop

Cocoa ranked seventh among futures, as old crop stores were worked off. New crop futures, however, are developing an inversion based upon supply concerns.

Coffee

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

KCH0

Future

136.35¢/lb.

9.8%

Contango

JO

ETN

$38.85

15.1%

Our look at food futures wraps up with coffee, ranked No. 11 in our list. Coffee remains very thinly traded, and the apparent return advantage shown by the exchange-traded note is mostly an artifact of light trading volume.

Cotton

Product

Type

29-Dec-09

Market Price

Apparent YTD

Profit/Loss

Market

Condition

CTH0

Future

75.07¢/lb.

29.2%

Contango*

BAL

ETN

$36.87

31.2%

*Old crop

Finally, there's cotton, another market with differing dynamics between old and new crops. Both cotton futures and the iPath Dow Jones-UBS Cotton Sub-Index ETN (NYSEARCA:BAL) can be very thinly traded, but still, cotton futures earned a sixth place in this year's performance ranking.

The Commodity Scorecard

Eleven of 12 futures that are the bases of exchange-traded products produced positive returns in 2009. Ranked, they were:

Rank

Commodity

YTD Gain/

Loss

1

Copper

129.2%

2

Sugar

90.1%

3

Silver

50.8%

4

RBOB Gasoline

53.0%

5

Crude Oil

30.9%

6

Cotton

29.2%

7

Cocoa

26.6%

8

Platinum*

24.0%

9

Gold

23.2%

10

Heating Oil

21.5%

11

Coffee

9.8%

12

Natural Gas

-21.1%

*Performance marked from 7-Apr-09

This list is obviously neither exhaustive nor definitive. But it is instructive. For the most part, ETP market prices appear to sync up with those of the underlying futures with some notable—and glaring—exceptions.

Investors, of course, shouldn't rely upon last sale prices to judge an ETP's performance; the current bid/ask is more representative of an ETP's true value. Investors should also keep in mind that liquidity, variance in futures market conditions and index methodologies can all contribute to an apparent skew in ETP performance when compared to futures.

These rankings are sure to change in 2010, as some markets are transitioning from ample to questionable supply. You can be sure that we'll mark their progress to market a year from now.

Source: Ranking 2009's Commodity ETPs