How Would You Like Your Commodities?

Getting commodity exposure nowadays is like going to a diner and ordering eggs. You can get any number of styles.

You like your futures managed? No problem. Got plenty of managed accounts to choose from. Collectively, their performance can be benchmarked against the Credit Suisse/Tremont Managed Futures Index.

Is passive investing more your style? A couple of commodity ETFs now have one-year track records to consider.

So let's consider those track records against the performance numbers for the Credit Suisse/Tremont managed futures index released this week.

Sep ‘07 Return YTD Return 1-Year Return Standard Deviation Sharpe Ratio CS/Tremont Index 4.52% 2.39% 7.86% 12.58% 0.44 iShares GSCI ETF (GSG) 9.44% 17.72% 0.08% 19.70% -0.24 PowerShares DB ETF (DBC) 9.42% 14.36% 12.44% 17.46% 0.44

Source: Credit Suisse, Commodity Systems, Inc., Brad Zigler

Wow! What a scramble. No wonder people have such disparate views on commodities. These widely varying results can be attributed to three factors:

1) Alpha hunting. Managed futures are just that - managed. A portfolio's advisor seeks gains based upon his skills. Some have genuine trading and risk-control talent; others exhibit only fleeting success.

2) Roll costs/yield. Futures trading is by and large opportunistic and focused on near-term objectives. Trading advisors rarely take buy-and-hold positions that necessitate rolling forward. The impact of contango and backwardation are thus minimized in managed accounts.

3) Mandates. Being index-based, ETF portfolios are formulaic: So much must be allocated to energy, so much to grains. Managed accounts are discretionary. If an advisor doesn't like the prospects offered by corn or gold, presently, she simply won't trade them. Keep in mind, too, that trading here includes short positions, something not found - yet - in index-based ETFs.

More about the ETF numbers will follow. In the meantime, enjoy breakfast.