Investors are jumping into commodity exchange-traded funds (ETFs) with both feet, as raw materials prices soar.
But some of the funds haven’t performed as well as the commodities they track.
Several oil ETFs, for example, haven’t risen as much as the price of oil itself, though they have registered solid gains, according to CNBC.
The problem for the oil funds is a phenomenon called “contango.”
That’s when longer-dated futures for a commodity trade at a much higher price than shorter-dated futures.
Contango is relevant for the oil ETFs because their oil holdings consist of futures. These funds have to regularly roll over their positions, selling short-dated futures and buying long-dated ones.
Because of contango, the funds have been selling oil futures low and buying futures high when they do their rollovers.
That limits returns, though contango has eased in recent months.
"The problem for individual investors is if there is an inefficiency of contango, the institutional guys know how to play it and take advantage of that, and the little guy is left way in the dust," Kathy Boyle, president of Chapin Hill Advisors, tells CNBC.
Those investors who dip into commodities will want a vehicle that allows them to partake in all the gains.
In the oil market, for example, industry legend T. Boone Pickens said in a speech that crude prices will reach $300 a barrel in the next decade if global demand isn’t trimmed.
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