The gist of the published paper revealed that commodity futures brought returns similar to those of equities but are uncorrelated with stocks and bonds. It also showed that historical risk of investment in commodity futures are low and a diversified commodities portfolio are slightly less riskier than stocks as shown by standard deviation. [Mining ETFs: Time to shine?]
In 2007, they published “The Fundamentals of Commodity Futures Returns,” which showed that an investor may improve upon returns by focusing on commodities with low inventory. The professors found that when inventories are low, commodities trade in backwardation (tomorrow’s product costs more than next year’s), and when inventories are high, commodities trade in contango (cheap today, costly next year). The resulting find was that backwardation portfolios outperformed the equally weighted index in a sampling from 1969 to 2006. [Reasons to be bullish on natural gas.]
For more information on commodities, visit our commodity category.
Max Chen contributed to this article.
