Our newsletter this week is taking a look at a regular topic of conversation around here: long-only commodity ETFs. The tendency of investors to jump on board with an investing thesis just before it turns sour is almost legendary. Attracted to the hottest investments like moths to a flame, they flutter in just in time to see the fire go out, and get stuck in a puddle of rapidly-cooling wax. Forgive us for stretching that metaphor, but you get the idea – chasing hot investments is as problematic as it is popular.
And when the boom in commodity prices in the early 2000s hit, it was no exception. Investor dollars lined up by the billions seeking commodity exposure, and financial engineers responded by providing a retail option for the masses – commodity ETFs.
The idea behind them was simple. Take some of your stock exposure and diversify it into another asset class, one which has been going up like crazy and feeds into the fear/excitement/confusion over the growth of China. Investors were asking, “where do I sign up?”
Have commodity ETFs been the diversifier people were looking for? Has that China thesis played out? Has an allocation to commodities helped portfolio performance?
Not by a long shot. Most commodity ETFs continue to have three big problems: high volatility, -50% to -90% down moves, and a built-in performance drag from the so-called negative roll yield. Click through to read the full breakdown.
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