Another (Bad) Way to Get Commodity Exposure

We’ve written about commodity ETFs before… and update our readers regularly on just how much investors in such ETFs underperform a simple strategy of just buying the December futures contract and rolling it annually.  But our reservations notwithstanding, the commodity ETF market has continued to grow, leading to products like Proshares leveraged commodity ETFS. Late last year they launched two new Natural Gas ETFs – Ultra DJ-UBS Natural Gas (BOIL) and UltraShort DJ-UBS Natural Gas (KOLD).

In our opinion, the only thing worse than getting commodity exposure via an ETF is doing so in a leveraged fashion, with these ETFs leveraged to provide 2x the return (long or short) of the Dow Jones-UBS Natural Gas Subindex (DJUBSGN).  Our other beef is that commodity ETFs only give you a one directional bet (up), and don’t attempt to control risk at all. You are simply long and wrong when and if there is a commodity market correction (rather common place, especially in Natural Gas).  Insert your favorite analogy here (like a car that doesn’t go in reverse, playing golf with just one club, getting on a plane which has no landing gear and must always go up, etc.)

It looks like ProShares got part of this message by releasing an offering which tracks the short side of Natural Gas – but that is just the same mistake in reverse. It still goes in just one direction (they have fixed the car which only goes forward by releasing a new model which only goes in reverse).

The bigger picture is that as ETF’s become more popular, they are branching into alternatives. But just because an ETF on Natural Gas (or any other commodity) can be built in a day doesn’t mean it’s a good idea for anyone. Remember that long-only and short-only ETFs put the onus on investors (or their advisors) to manage the risk, size their bets, and reallocate when prices go the opposite direction (quick everyone, get out of this car, and into the other car – we’re now going to go into reverse).

And Natural Gas… For retail investors? Really?  While it is just a shadow of its former volatile self, one need only look up Amaranth Advisors to remember just how much bite this market can have. Even seasoned investors have been sunk gambling on one side of Natural Gas price movements.

Graph of Natural Gas Futures from 1990
Disclaimer: Past performance is not necessarily indicative of future results.

What about instead of a long-only or short-only ETF, there was some sort of alternative which reacts to prices – going long when they are trending higher and short when they are trending lower?  And what if there were professionals making those decisions on whether to go long or short? Or, better yet, professionals designing computerized models which track historical prices to determine the best entry and exit points on both the long and short side? Oh, right – that already exists – and it’s called managed futures.

That, in our opinion, is the right way to get commodity exposure – not double leveraged bets on one direction or the other.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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