ETF Trends
ETF Trends

Commodities are still in a major correction period, so it is especially interesting when there’s any fund, index or indicator that’s not only outperforming, but is up year-to-date by double digits.

The S&P Commodity Trends Indicator is the underlying indicator for the ELEMENTS S&P CTI ETN (LSC). Although it launched in June, just in time for a big commodities correction, it’s up 13.2% year to date through Nov. 14 (while the S&P CTI Total Return is up 24.29% year-to-date from Jan. 1 through November 14.)

While the ETN is new, the indicator itself is not. Bryan O’Leary, head of U.S. Index Marketing for Alpha Financial Technologies, the creator of the S&P CTI, notes that it’s coming up on its five-year anniversary as calculated by Standard & Poor’s.

This significant milestone means that its one, three and five-year performance will now be real, as opposed to theoretical. The five-year annualized returns for the S&P CTI Total Return as of the end of October are 18.46%, outpacing its long-only competitors by a large margin. The indicator has also benefited from having been seen in a variety of commodity conditions.

“Most of the last five years, commodities have been bullish,” O’Leary notes. But that this indicator has managed to continue to perform in a challenging environment such as the current commodities bear market is especially noteworthy.

That the indicator is providing returns is a simple matter of its construction, which reflects trends. This allows commodities to be either long or short (except the energy sector which is long or flat but never short). Rather than going down with a sinking ship, the indicator can adjust its positions on a monthly basis, depending on how the individual commodities are trending at month’s end.

This chart tells the story:

Commodity Indexes and ETFs

The white line represents CTI; the red indicates the DJ AIG and green represents the S&P GSCI.

For a time, the major commodity indexes were more or less trading in line with one another. But in late summer, they diverged and the S&P CTI begins to steal the show.

The indicator goes both long and short in six areas: energy (long or flat only), softs, grain, livestock, industrial metals and precious metals. Using a seven month weighted moving average, the indicator then determines in what areas it will be long and where it will be short.

Earlier this year, as everything was trending up, the indicator was long in every area. In July, the indicator suffered along with everything else when the commodities decline began. But in August, the indicator began to change direction after the signal came to be short in everything – but oil.

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