Commodity Benchmarks versus ETFs

With all the fuss about using exchange traded funds (ETFs) for commodity investing, I thought it would be interesting to compare the recent returns of the major broad-based commodity ETFs to the returns of selected benchmarks: the Vista CTA commodity basket and the S&P Dow Jones-UBS Total Return commodity index (I did not have the data to include the S&P GSCI).

The 1 and 3 month, 1, 2 and 3 year returns, as of the close on 1/25/2013, for commodity benchmarks and a broad-based screen of commodity ETFs are shown in the table below:

		Rolling Returns as of 1/25/2013
Benchmarks		1 Month	3 Month	1 Year	2 Year	3 Year
VistaCTA Commodity Basket		1.56%	-0.63%	-3.51%	0.21%	8.04%
S&P Dow Jones-UBS Commodity Total Return Index	DJUBSTR	1.44%	-1.98%	-3.31%	-5.62%	1.44%
Broad Based Commodity Index ETFs
PowerShares DB Commodity Tracking	DBC	2.11%	1.78%	0.00%	1.16%	5.83%
iPath S&P GSCI Total Return ETN	GSP	4.11%	3.64%	-1.16%	1.00%	4.46%
iShares S&P GSCI Commodity	GSG	3.99%	3.39%	-1.00%	0.12%	3.44%
United States Commodity	USCI	1.09%	-0.19%	-3.95%	-4.00%	na
ETRACS DJ-Commodity Total Return ETN	DJCI	1.50%	-2.19%	-3.73%	-6.22%	0.90%
iPath Dow Jones-UBS Commodity Total Return ETN	DJP	1.26%	-2.27%	-4.56%	-6.68%	0.72%
Exotic or Enhanced Commodity Index ETFs
GS Connect S&P GSCI Enhanced Commodity Total Return Strategy ETN	GSC	3.16%	2.56%	-0.34%	-1.66%	5.65%
RBS Rogers Enhanced Commodity ETN	RGRC	3.01%	3.22%	-1.69%	0.70%	5.20%
ELEMENTS Rogers International Commodity - Total Return ETN	RJI	1.42%	1.28%	-1.94%	-2.30%	5.05%
iPath Pure Beta S&P GSCI-Weighted ETN	SBV	0.81%	0.00%	-2.56%	-0.31%	4.44%
UBS E-TRACS CMCI Total Return ETN	UCI	0.45%	-1.78%	-7.59%	-6.07%	3.93%
GreenHaven Continuous Commodity	GCC	1.38%	-0.66%	-4.11%	na	na
ETRACS DJ-UBS Commodity 2-4-6 Blended Futures ETN	BLND	-1.04%	-3.25%	na	na	na
STREAM S&P Dynamic Roll Global Commodities	BNPC	1.57%	1.64%	na	na	na
PowerShares DB Commodity Long ETN	DPU	1.29%	na	na	na	na
Sources: Yahoo and S&P Dow Jones website

How interesting! Let’s begin with two caveats. First, the benchmarks do not include fees and ETFs do. Second, these returns are valid only for the periods shown and will significantly vary for different periods.  But putting that aside, a few things stand out.

1.      According to the DJ-UBS, it has been a tough few years for commodities.  The VistaCTA basket will beg to differ but that’s for another discussion. (Too bad I don’t have the GSCI numbers which may be pretty good given the run energy has had.)

2.      Of the Broad Based Commodity Index ETFs, the Powershares, iPath and iShares (DBC, GSP and GSG) acquit themselves well.  They appear to keep up with or exceed the returns of the Benchmarks. Good job. Of course, the caveat here is that the DBC tracks an entirely different index while the GSP and GSG track the “energy overweighted” S&P GSCI.

3.      Across the board, except for DJP, the broad based ETFs matched or outperformed the Benchmarks for the 1 year period. This includes this summer’s heatwave grain market boom and bust and the collapse of the softs markets (coffee, sugar, cocoa, cotton). The GSCI energy ETFs, especially, avoided this calamity. 

4.      Given the mixed results of the so-called “exotic”, “enhanced” or “third generation” ETFs, I think the jury is out on whether or not these enhancements are truly improvements. A case can be made that an “enhanced” index is just a certain kind of actively managed account in “index’s clothing”. 

As shown above, there are many ways to invest in commodities.  ETFs are one way, owning a basket of futures contracts in a single managed account is another. Each may have its advantages. ETFs offer convenience while a futures account offers direct ownership of commodity futures contracts. Both send you 1099s (or a K-1 in the case of DBC and some other ETFs.)

You never know which investment will outperform for any given future period.  What is realistic and what one may hope for is that there is some consistent methodology that can respond to future conditions as it has to the past.  Indexing has been shown to outperform active management across many periods. At the same time, indexing has also been shown to have higher risk profiles.  The investor has to decide whether or not the added risk profile is worth the hoped for added return.