When rolling becomes an uphill battle: Index Funds, contango and total returns in commodity markets

Sep 27th, 2010 | Filed under: Commodities, Hedge Fund Industry Trends, Today's Post | By:
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By: Neil Kotecha, BNY Mellon & AllAboutAlpha.com Editorial Board

A recent topic in many financial publications has been the persistence of adverse market conditions facing commodity investors. Specifically, investors’ returns differ significantly from commodity price returns. The articles in these publications tend to illustrate the drag on total returns when unfavorable conditions result in negative roll yields. The importance of roll yields was highlighted in this AllAboutAlpha.com post by Keith Black from June 2008. Additionally, a more recent AAA post touched upon the impact investors may have on the market index.


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  1. Thank you for this analysis. It does, however, bring into question the value of commodities as an asset class. Here’s why, if the roll yield is largely negative as we have seen for several years, and the collateral yield is approaching zero in a low interest rate environment, one is relying entirely on spot price changes for total return. Commodity spot price changes provide no systematic upward bias over time nor is there inherent systematic risk in spot prices only. This may leave us with commodities as an inflation “trade” or a weak dollar play. Either way, commodities become of more interest as a short/intermediate term macro trade rather than a defined asset class.

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