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Futures-Based Commodity ETFs

Ilan Guedj, Guohua Li and Craig McCann
The Journal of Beta Investment Strategies Summer 2011, 2 (1) 14-24; DOI: https://doi.org/10.3905/jii.2011.2.1.014
Ilan Guedj
is a principal at Securities Litigation and Consulting Group, Inc., in Fairfax, VA.
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  • For correspondence: ilanguedj@slcg.com
Guohua Li
is a senior financial economist at Securities Litigation and Consulting Group, Inc., in Fairfax, VA.
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  • For correspondence: guohuali@slcg.com
Craig McCann
is the president of Securities Litigation and Consulting Group, Inc., in Fairfax, VA.
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  • For correspondence: craigmccann@slcg.com
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Abstract

Exchange-traded funds (ETFs) have become popular investments since first introduced in 2004. These funds offer investors a simple way to gain exposure to commodities, which are thought of as an asset class suitable for diversification in investment portfolios and as a hedge against economic downturns. However, returns of futures-based commodity ETFs have deviated significantly from the changes in the prices of their underlying commodities. The pervasive underperformance of futures-based commodity ETFs compared to changes in commodity prices calls into question the usefulness of these ETFs for diversification or hedging. This article examines the sources of the deviation between futures-based commodity ETF returns and the changes in commodity prices using crude oil ETFs. The authors show that the deviation in returns is serially correlated and that a significant portion of this deviation can be predicted by the term structure of the oil futures market. They conclude that only investors sophisticated enough to understand and actively monitor commodity futures market conditions should use these ETFs.

TOPICS: Exchange-traded funds and applications, commodities, futures and forward contracts

  • Copyright © 2011 Securities Litigation and Consulting Group, Inc. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Index Investing: 2 (1)
The Journal of Beta Investment Strategies
Vol. 2, Issue 1
Summer 2011
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Futures-Based Commodity ETFs
Ilan Guedj, Guohua Li, Craig McCann
The Journal of Beta Investment Strategies May 2011, 2 (1) 14-24; DOI: 10.3905/jii.2011.2.1.014

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Futures-Based Commodity ETFs
Ilan Guedj, Guohua Li, Craig McCann
The Journal of Beta Investment Strategies May 2011, 2 (1) 14-24; DOI: 10.3905/jii.2011.2.1.014
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  • Article
    • Abstract
    • THE DYNAMICS OF FUTURES MARKET
    • FUTURES-BASED COMMODITY ETFS: CASE STUDY OF CRUDE OIL ETFS
    • UNITED STATES OIL FUND (USO)
    • UNITED STATES 12 MONTH OIL FUND (USL)
    • POWERSHARES DB OIL FUND (DBO)
    • PREDICTIVE POWER OF THE TERM STRUCTURE
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

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