Commodity exchange traded funds (ETFs) are not without allure. With good reason; it wasn’t long ago that only the biggest, baddest investors could invest in them. Today, anyone can. But watch out for surprises.
Case in point: in 2008, the stock markets got nasty and commodity indexes moved practically in lockstep. It’s been well-documented that even as commodity prices gain, ETFs don’t necessarily mirror the gains 100%. It has many investors asking whether commodity ETFs truly boost returns and reduce risk, Rob Curran for The Wall Street Journal reports. [Why Precious Metals ETFs Are Successful.]
A landmark paper authored by a Yale professor and a University of Pennsylvania professor in 2004 examined those very questions. [How Metals ETFs Changed Investing.]
Among the findings:
- Researchers found a negative correlation between commodities and the other assets during the period between 1954-2004. One of their most influential findings: commodities had above-average returns during months of below-average returns for stocks in that 45-year period.
- This does not mean that this is the rule. Both asset classes can also move in the same direction, as many have found. [All About Equity Commodity ETFs.]
One theory for the unusual trading patterns was floated by Paul Justice at Morningstar, who believes that the similarity could be coming from the fact that the participants in both markets are becoming more similar. Those participants may also be looking at commodity ETFs less as a portfolio diversifier than past participants have.
Where does that leave us? If you can’t roundly count on commodities to rise when stocks fall or vice versa, try implementing a simple strategy and ride the trends until they vanish. We follow the 200-day moving average, and you can read about it here.
For more stories about commodity ETFs, visit our commodity ETF category.
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.