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A Look At The Next Generation of Commodity Indexes

This bears further study, but initial thought is that Morningstar is contradicting itself. If the commodity futures market is symmetric, then logically roll yield is an illusion at worst; at best roll yield opportunities can only be realized through fundamental analysis/active management, not passive management... passive management will result in long-term symmetric outcome = 0... My thesis is that roll yield (ie, backwardation, contango) exists, but only in narrowly define circumstances tied directly to specific bona fide hedger within specific timefame/context... That is, roll yield model = arb model which is circular reference! Also, if speculators are being paid risk premia, that premia is being spread too thinly and returns are then result of inherent leverage in futures market (10x based on maring/equity) (See Spurgin 2000)... beyond that, claims of passive investment indices capturing roll yield risk premia is questionable myth of industry... BTW, annualized roll yield chart Exhibit 2 is from Erb and Harvey (2006) study... this study is contradicted by certain prior studies which concluded systematic risk = 0... all are modeled on regression analysis, therefore backward looking, curve-fitted, and optimized... CFTC requires hypothetical disclosure... Is morningstar disclosing that roll yield chart as hypothetical? Perhaps they should be! Academic research dating back to Dusak (1973) is inconsistent as to whether risk premia is available, either backwardated or contango... Beware of marketing masquerading as studies... again, the studies are inconsistent and may be based on false assumptions... Backwardation/contango model is circular reference! Futures markets are behavioral... Passive strategy = systematic trend-following CTA... Also, morningstar is copying similar passive strategy of MLM Index which has been around since 1988. Understand that alpha decisions are which sector to weight at any particular time over what time period... their 10% cap on weightings skews any logical economic analysis... Finally, note that passive strategy is backward looking, not forward looking... since methodology is made public... will be faded by speculators/arbitrageu... and morningstars' assumed roll yields will be arbed away... spamfighter01@earthlin...