The Product-ization of Commodity “Investing”

As I’ve said before, the purveyors of investment products are great at one thing: creating new products when an asset class gains popularity. While we have seen this with tactical allocation and socially responsible investing, nowhere has it been more prominent than the boom in investable commodity products.

Standard & Poors created the GSCI Commodity Index in 1991. In 1998 Dow Jones created the DJ-UBS (formerly DJ-AIG) commodity index. Prior to these, commodities weren’t considered to be investment assets for most.  Creating benchmarks gave commodities legitimacy and caught the eye of the investing public. From 2000 to 2008 commodities went through a huge boom. (I’m not here to speculate as to whether this is based on the broad acceptance of commodities as investments or true global supply and demand, I’m just stating the facts.)  Below is a chart of the Dow Jones-UBS Commodity Index from 2002 – April 2013.

DJ-UBS chartThe tremendous rally through 2008 meant that fickle investors were ripe for the picking, and the investment industry complex responded.  New funds started rolling out. From late 2007 through mid 2008 the US equity market was declining but commodities continued their advance.  Commodities were seen as the savior of a diversified portfolio until the bubble in commodities burst in the late summer of 2008.

DJ-UBS Commodities & The S&P 500
DJ-UBS Commodities & The S&P 500

Since then, commodities crumbled and have yet to fully recover.

DJUBS from 6-2008


Unfortunately, investors failed to fully participate the returns that came in the last decade.  If we use the highly popular PIMCO Commodity Real Return fund as a proxy, we can see that the fund (A shares) returned 6.65% over the past 10 years (ending 3/31/13) but fund investors gained just 2.84% due to money pouring into the fund at the end of the performance boom.

Through 3/31/13, there were only 11 funds in the Lipper mutual fund category covering commodities that had 10 year track records (implying that they existed 10 years ago). There are only 35 funds with a five year track record at Lipper. Morningstar didn’t even have a category for commodity funds until 2009 when the popularity boomed – which correlates nicely with the peak of the benchmark.

In 2009 there were 50 funds in the Morningstar category. By 2011 that figure had more than doubled to 103. Today both Lipper and Morningstar commodity categories report on upwards of 100 different mutual funds.

That is only counting the traditional open-ended mutual funds. The exchange-traded fund (ETF) space has also witnessed a dramatic proliferation of products related to commodities. According to IndexUniverse there are currently 147 available ETFs in the commodity space.  That figure doesn’t include the dozens of funds that were launched and subsequently liquidated in the past five years. These ETFs aren’t just reasonable broad-basket commodity products either, as we can see below.

Care to invest in:

  • Short Platinum?
  • A covered-call Gold strategy?
  • Coffee futures?
  • How about a 2x leveraged “Base Metals” fund?
  • Or my favorite, a 3x leveraged short Natural Gas play?

These aren’t products that are designed for, or good for investors.  They are designed to provided misguided hope to those who think they are capable of day trading and provide nice profits to the fund companies that offer them.  They are the payday loans of the investment world. Unfortunately there are many investors and advisors who are more than happy to declare that they can use these products without putting investment dollars at great risk.  I politely disagree.

As a whole, it would appear that the release of legions of commodity-related index products has been foremost to the benefit of the investment industry rather than the investors themselves.



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