How Well Do ETFs Track Futures? [CHART]

You wouldn’t believe the number of people that have asked us for the best way to invest in commodities; trying to cash in on the overall market moving higher. Most of them have already been to Morningstar, to see if $USO or $CORN will allow them to play the bounce in crude oil. If you’re a frequent reader, you’ll know that we highly discourage anyone from $USO, and our latest table is a perfect example. It’s our monthly look at the various commodity ETFs and how they track a simple strategy of buying end of year futures and rolling them annually. Here is the result for 2015:

Just so we’re clear on what’s being shown below – if you thought it was a good time to own commodities in 2015 and added each of the ETfs listed below to your portfolio, you would have lost, on average, -23.88% for the year. If you were a frequent reader of this blog and instead chose to get your long exposure through long dated futures contracts – you would have lost -18.78%, on average, for a 5.10% (5,100 basis point) difference {Disclaimer: Past performance is not necessarily indicative of future results}.

Finally, if you had instead chosen the Commodity sector ETF, $DBC, you would have lost -27.59% (higher than the average of our commodity ETFs because it is more skewed towards oil), whereas the BarclayHedge Ag Trader Index was down just -0.47% for the year. {Disclaimer: Past performance is not necessarily indicative of future results}

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For the umpteenth time – you wouldn’t buy a car that only goes forwards (you probably want reverse). So why buy an ETF that only makes money when commodities go up. If you want to own commodities and get that exposure, do it dynamically – do it via programs that can benefit from rising AND falling prices. The difference could very well be 20% or more as it was in 2015.   And if you must own commodities only from the long side, make sure you do it via long dated futures instead of the ETFs. The difference there could be significant as well.

(Data as of: 12/31/2015)

Commodity ETF Over/Under Performance 2015

(Disclaimer: Past performance is not necessarily indicative of future results)
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index)