Living4Dividends

Commodity Index Funds: The Good, The Bad and The Ugly

On May 14 12:31 PM punk_ash wrote:

>
> I think investing in the commodity companies is much better, they
> just might give you a dividend rather than charge the contango fee.
>

Agreed. It is better to own the companies with the physical commodity already in the ground

Commodity Index Funds: The Good, The Bad and The Ugly

On May 14 12:31 PM punk_ash wrote:

> We live in a bizzaro world. All pundits are screaming about commodities.
> The financial firms have flooded the markets with commodity ETF and
> ETN. No one will tell you that most markets are in general in contango,
> especially energy due to storage issues. That means a continuous
> bleeding of your portfolio as you are paying someone to store oil
> and gas.
>
> If the spot price stays flat or about flat, that ETF will start going
> to a BIG 0. Check out the performance of OIL, UNG, USO.
>

Agreed. IT takes alot of work at the returns are minimal. I am also a contrarian - if everyone is doing it, then I'll do something else.

Commodity Index Funds: The Good, The Bad and The Ugly

From my very limited knowledge of commodities
the investor gains positive roll returns (makes money) during backwardation
I would assume that the investor does not get positive roll returns during cotango.

My question to Marc Gerstein is: how does that make commodities a bad investment?

Commodity Index Funds: The Good, The Bad and The Ugly

My intent was to show the "Joe Average" investor - that commodity funds, while widely touted, are not necessary for a prudent portfolio. I have listed 6 (six) clear negative aspects about commodity futures.

Some articles on Asset Allocation say you should have "5% Commodities." The average retail investor does not understand the positive roll returns during backwardation (and the absence thereof during cotango).

I will add a 7th negative aspect about commodities: "no one should invest in something that they don't fully understand."

Commodity Index Funds: The Good, The Bad and The Ugly

On May 10 11:10 AM Marc Gerstein wrote:

> There are some valid points here, particularly regarding counterparty
> ETN risk and the increase in correlation between commodities and

Thank you for your kudos

> you missed the main point that could have been raised to support
> your case; the impact of contango and negative roll yield, and how
> they imact ETF-ETNs (and ofcourse, you;d have to cover the flip side;
> backwardation and positive roll yield). That's a very odd omission.
>

You are indeed correct: I thought about adding a paragraph about the positive roll returns during backwardation, but I wanted to keep the piece short.

If you could post an elaboration in the comments section, it would be helpful to the readers and help support the case against commodities. Thanks in Advance!

The Ultimate Commodities ETF Guide

Don Dion - you said
"... If you’re an individual investor looking for commodity exposure but have little knowledge of the sector, stick with the broad indexes..."

I say if an investor has little knowledge of the sector, then the investor should STAY AWAY. Why invest in something you know little about?

Furthermore, ETNs expose the investor to counterparty risk. Remember back when Lehman was bankrupt and had backed all those ETNs? If I was an investor in a Lehman ETN, I would have been been either a) extremely nervous and b) forced to sell out my position at an inopportune time in order to eliminate the risk of a Lehman default.

Don I was glad that you went on to say "Exposure isn’t necessary for a portfolio, but besides a play on an economic recovery, the broad indexes also offer inflation protection." There are other things that offer inflation protection with alot less risk.

I am currently working on an article on Commodities which I plan to post in Seeking Alpha.