Page 1 of 2 It seems all of my end-of-summer barbecues invariably result in a bout of backyard braggadocio about investments. Not that I invite it, mind you; it just happens. This week's get-together featured more plaints than posturing, as my acquaintances invested in commodity index exchange-traded funds groused about their funds' poor performance. "If commodities are doing so well," grumbled Medium-Cheeseburger-Hold-the-Onions, "how come I'm not making any money?" "Yeah," carped Spicy-Linguica-Lots-of-Mustard, "I was supposed to earn twice the market return. Instead, I think I earned less than the index!" I must admit that my explanations, punctuated with bites of potato salad, lacked the numerical foundation of my typical HAI (www.hardassetsinvestor.com) articles, but one can only do so much without a whiteboard. For the record (and the further edification of charbroiled investors everywhere), let me elucidate fully. Four Commodity ETFs: Side By Side First, a little stage setting. The backyard complaints were made about exchange-traded funds, not notes. ETFs and ETNs, while similar in many ways, are plainly different vehicles for obtaining index exposure. Apple and oranges there, so we'll look only at ETFs in this analysis. By the grill, we discussed four broad-based commodity index ETFs:
- The PowerShares DB Commodity Index Tracking Fund (NYSE Arca: DBC), which is based upon the Deutsche Bank Liquid Commodity Index - Optimum Yield Excess Return (Index), a benchmark composed of six of the most heavily-traded futures contracts in the world;
- The iShares S&P GSCI Commodity-Indexed Trust (NYSE Arca: GSG), which tracks the S&P GSCI Total Return Index (a variant of the former Goldman Sachs Commodity Index), a production-weighted group of two dozen commodity futures;
- The GreenHaven Continuous Commodity Index Fund (NYSE Arca: GCC), whose benchmark is the current iteration of the equal-weighted successor to the Commodity Research Bureau Index, a portfolio comprising 17 commodity futures; and
- The ProShares Ultra Dow Jones-UBS Commodity Index Fund (NYSE Arca: UCD), which attempts to offer twice the daily return of the Dow Jones-UBS Commodity Index, a simulation of a 19-commodity portfolio.
If there were an overhead projector available, we could have regarded a colorful depiction of the ETFs' year-to-date performance that would have looked like this: Broad-Based Commodity Index ETFs 
It seems as if whatever distinctiveness a fund exhibited early in the year eroded as time passed. The performance characteristics separating the funds in the spring appear to have been largely mitigated by the time fall rolled around. Year-To-Date Performance | | Period Return | Annualized Volatility | Sharpe Ratio | | GCC | 8.99% | 24.04% | .51 | | GSG | 4.86% | 37.42% | .17 | | UCD | 5.78% | 53.41% | .15 | | DBC | 2.88% | 29.36% | .13 |
While there's only a 6.11% absolute top-to-bottom performance differential, the spread's quite significant in relative terms; after all, GCC's return was three times that of DBC. What accounts for the performance dispersion among these funds? Basically, it boils down to the three C's: composition, contango and compounding.
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