This morning Barclays offered a webinar to educate about commodities and exchange traded funds (ETFs) with David Blitzer, Managing Director and Chairman of S&P. Blitzer went through the basics of commodities and futures contracts, specifically focusing in on the S&P GSCI Index. Below are some highlights from his presentation.
Commodities are products such as oil, grains, metals, softs (coffee, sugar) and agriculture (cattle, hogs), which are bought using futures contracts. A futures contract is an agreement to buy or sell on a future date at a price set now. Funds must be deposited into a margin account to cover the cost. Contracts are often "rolled", meaning they are not held until maturity. A spot price is the immediate price with immediate delivery.
The total return is different from a total return for a stock. It has 3 major components.
- Interest: this is the interest earned on the deposit in the margin account. Often times Treasuries are used for the deposit;
- Change in the commodity price;
- Roll Yield: as the contract matures it may get closer to or further away from the spot price, known as contango and backwardation.
S&P GSCI index holds 24 futures contracts, which are selected and weighted by importance to global economy. iShares offers the S&P GSCI Commodities-Indexed Trust (GSG), which follows the index. They also offer two exchange traded notes (ETNs), iPath S&P GSCI Total Return (GSP) and iPath S&P GSCI Oil Total Return Index (OIL). All 3 of the products hold futures contracts, but the main difference is in the structure. ETNs are notes that pay the total returns, whereas the ETFs follow the index and are subject to capital gains and interest.
Before investing in commodities, it is important to understand the commodity markets as well as how the investment will affect your risk tolerance and goals.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.