Let it Roll

A recent WSJ article discussed the lagging performance of several energy ETF’s relative to their underlying spot commodity prices. The article points out that the performance gap is a result of the steep contango that has existed in both Crude Oil and Natural Gas over most of the last year. The move towards commodity indexation on the institutional side has left many commodity portfolios with lagging returns this year, given the spot under-performance. The underperformance of ETF’s and various indices only highlights the fact that most markets trade with some kind of normal carry (contango). Thus if an investor wants to get exposure to a particular commodity, it is understood that a position in either the physical or the ETF will involve a bet on the spot outperforming the carry. If said investor is not confident in such a move, they should be flexible in their approach and look to gain intelligent exposure elsewhere, perhaps in some commodity related equities.