Here’s why commodity trackers lose you money
The Goldman Sachs Commodities Index has done very nicely this year, rising by nearly 45 percent since January 1. So if you had bought a commodity tracker fund then, you’d be pretty happy today, eh? Well, no.
This chart shows that the total return to an investor is a mere 12 percent. Measured since January 2005, the picture is even worse. Despite the boom, which has driven the index up by about 60 percent, our investor will actually have lost about 15 percent of his capital over four years.
In theory, commodity trackers should be as attractive as share index trackers. Pooled funds allow investors to buy an index at low cost, so why not do the same with commodities?
Standard & Poors reckons that $100 billion is invested in commodity tracker funds, and it is only now that the problems are becoming clear. Unlike shares, commodities need space and insurance for storage, so the funds buy the commodities forward, selling them before having to take physical delivery and buying forward again. Because they have strict rules about how and when they roll the contracts, the traders can see the forced sellers (and buyers) coming a mile off, and move their prices accordingly.
This is, effectively, a tax on the fund, and the bigger the fund gets in any one market, the greater the tax the traders can demand to roll its contracts. The result is to guarantee underperformance against the relevant index, and the longer the investment is held, the greater the underperformance will be.
That’s bad enough, but it gets worse: shares produce dividends, so a tracker fund should automatically outperform its basic index simply because of the effect of reinvested dividends. There are no dividends from holding commodities, just the hope of a capital gain on what’s left after the traders have scalped you. They are quite probably employed by the same bank that runs the commodity tracker.
The moral of this story is that anyone tempted to diversify a portfolio by buying into a commodity fund should lie down until the feeling goes away.