Commodity indices and exchange-traded products (ETPs) should be regarded as short- to medium-term investments rather than long-term strategies, as a quick glance at performance over the last 10 years shows.
Their value lies in providing simplicity and liquidity for retail investors and institutions such as pension funds, which do not want the complexity of managing futures positions with their daily margin adjustments and rollovers.
They also permit institutions and retail investors forbidden from investing in derivatives to gain exposure indirectly by repackaging derivatives as swap transactions or embedding them in structured notes, which resemble debt or equity securities.
But they are really only suitable for implementing tactical and value-based views about the short-term direction of commodity prices over horizons ranging from intraday trading of a few hours to as much as six to 36 months to exploit the economic and commodity price cycle.
Their usefulness deteriorates over longer horizons as the cost of carrying the position outweighs eventual cyclical or secular price gains. "Buy and hold" strategies tend to lose money over the long term.
