- Investors must keep in mind that most of their commodity-related ETFs do not track the spot price
- However, there are some exceptions, including precious metals-related exchange traded products
- Futures market may diverge from the spot price due to a number of factors, including storage costs and seasonal patterns
With commodity exchange traded funds gaining traction as raw materials prices are on the mend, it is important for investors to keep in mind that most of their commodity-related ETFs do not track the spot price.
Most commodity ETFs do not track the spot price, or commodity prices as investors see them in the headlines. However, there are some exceptions, including precious metals-related exchange traded products that are backed by physical gold, silver, platinum and palladium bars stored in bank vaults.
Most commodity ETFs track futures contracts. The futures market may diverge from the spot price due to a number of factors, including storage costs and seasonal patterns, among others. Consequently, investors would be exposed to the intricacies of the futures market, which may not perfectly reflect the spot price returns of the underlying commodity.
Specifically, investors will have to watch for roll returns or roll yields. Since the commodity ETFs hold futures contracts, these ETFs avoid physical delivery before a contract expires by rolling the contract or buying a new contract with a later maturity date.
“This is where spot and futures returns start to differ,” writes James de Bunsen, multi-asset fund manager at Henderson Global Investors, for the Financial Times.