Amber Waves of Pain: Commodities ETFs Are Killing Investors
07/26/2010 0 comments
BusinessWeek published an article in its latest issue on how badly commodity ETFs have underperformed recently, even compared with their underlying commodities. The most glaring example is U.S. Oil fund (USO): in February 2009, for example, crude rose 7.4 percent while USO fell by 7.4 percent! Other commodity ETFs mentioned in the article include: U.S. Natural Gas Fund (UNG), Poweshares DB Agriculture Fund (DBA).
The main culprit is what is called Contango problem: when contracts for future delivery of a commodity are more expensive than near-term futures contracts. Most commodity ETFs have to roll near-term soon to expired futures contracts to longer term contracts and pay dearly for such rolls. From investors' point of view, the end results are that such ETFs fail to deliver their promise: closely matching the underlying commodity prices.
(Con)Tango
On the other hand, gold fund GLD or silver fund SLV use physical commodities that are free of the contango problem. So far, they have delivered what they are supposed to deliver: closely matching the spot prices.
We are cautious on commodities ETFs. This is especially true in MyPlanIQ Strategic Asset Allocation (SAA) portfolios. This is less an issue in Tactical Asset Allocation TAA portfolios as the price underperformance will automatically weed out those ETFs.
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