ETF.com Presents INSIDE COMMODITIES WEEK

Transcription

1 ETF.com Presents INSIDE COMMODITIES WEEK A Practical Guide to Commodity Investing: 5 Things Every Investor Needs to Know November 17, 2014 swaps John T. Hyland, CFA Chief Investment Office United States Commodity Funds CFP Continuing Education Credits: 1 Hour IMCA has accepted this event for 1 hour of CE credit towards the CIMA, CIMC and CPWA certifications.

2 Important Legal Disclosure: NOTE: Mr. Hyland s views expressed in this presentations are his opinions and do not necessarily represent the views of, or attributed to, the United States Commodity Funds or ETF.com. Furthermore they are intended for educational purposes only and do not constitute recommendations to buy or sell any investments. In addition, Mr. Hyland is not a tax expert and nothing expressed constitutes tax or accounting advice. RISK FACTOR AND FORWARD LOOKING STATEMENTS Investments in commodity-based exchange traded securities involves risks. These risks can significantly impact the market value of the commodity-based exchange traded securities. Investors are advised to read the appropriate risk section in the prospectus of any commodity-based exchange traded security for more detailed information prior to investing. This presentation may include forward-looking statements. These forward-looking statement include comments with respect to investment objective and strategies and investment results. However, by their nature, these forward-looking statements involve numerous assumptions, uncertainties and opportunities, both general and specific. The risk exists that these statements may not be fulfilled. causing actual investment results to differ from those discussed during this presentation. Persons viewing this presentation are cautioned not to place undue reliance on these forward-looking statements because a number of factors could cause investment results to differ materially from these statements. Forward-looking statements may be influenced in particular by factors such as fluctuations and volatility in the markets for the financial instruments in which commodity-based exchange traded securities invest and the commodities underlying certain of these financial instruments, the effects of competition from other participants in the financial services industry, and changes in economic, political and regulatory conditions. This list is not exhaustive and persons viewing this presentation are cautioned that other factors, some of which may be unknowable at this time, may influence forward-looking statements made during this presentation. When relying on forward-looking statements to make decisions, investors should carefully consider the aforementioned factors as well as other uncertainties and events. United States Commodity Funds LLC undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information or future events.

3 Commodity Investing is more than just Gold and Crude Oil! The Major Actively Traded Commodities Precious Industrial Metals - Energy - Grains - Livestock - Softs - Metals Gold WTI Crude Corn Cattle Sugar Copper Silver Brent Crude Wheat Hogs Coffee Tin Platinum Gasoline Soybeans Cocoa Lead Palladium Heating Oil Cotton Nickel Natural Gas Zinc swaps Gasoil Aluminum NOTE: Not all major commodities are easily investable/tradable by investors. Examples include rice, coal, steel, and iron ore.

4 Commodity Investing is more than just Gold and Crude Oil! Average Annual Total Returns January 1991 to October 2013 SDCI Commodities since January 1991 to October 2013 Excess Returns, Front Investable Month 1 'RB' RBOB/Unlead Gasoline 10.62% 2 'SM' Soybean Meal 9.19% 3 'CB' Brent Crude Oil 9.13% 4 'LF' Gas Oil 7.93% 5 'PL' Platinum 6.30% 6 'HG' Copper 5.86% 7 'MSN' Tin 5.67% 8 'CL' WTI Crude Oil 5.42% 9 'HO' Heating Oil 4.40% 10 'SB' Sugar 4.08% 11 'SI' Silver 3.89% 12 'S' Soybean 3.55% 13 'GC' Gold 2.23% 14 'MNI' Nickel 1.98% 15 'FC' Feeder Cattle 1.90% 16 'MPB' Lead 1.88% 17 'LC' Live Cattle 0.32% 18 'BO' Soybean Oil -2.47% 19 'MZN' Zinc -3.28% 20 'LH' Lean Hogs -3.53% 21 'CC' Cocoa -4.59% 22 'MAL' Aluminum -4.97% 23 'CT' Cotton -5.85% 24 'W' Wheat -6.39% 25 'C' Corn -6.65% 26 'KC' Coffee -7.40% 27 'NG' Natural Gas % Source: SummerHaven Index Management

5 TWO Ways for Financial Investors to Access Commodity Exposure Buy and Store the Physical Commodity Total Return = Change in Spot Price - Storage Cost Buy and Hold the Commodity Futures Contract swaps Total Return = Change in Spot Price + Cash Yield +/- Roll Yield

6 Is the Spot Price Return Better Than the Futures Return Over Time? It Depends On the Commodity and the Time Frame! swaps SCI TR DJ-UBS Copper TR Spot Copper Spot Copper - Storage Cost Source: SummerHaven Index Management

7 WARNING! Contango and Backwardation are not Dance Steps! Backwardation Contango

8 Contango and Backwardation are NOT Dance Moves! Backwardation is when the spot price/front month price is HIGHER than further out contracts, so you buy the 2 nd Month contract at a DISCOUNT to spot Contango is when the spot price/front month price Those that Is buy LOWER than further out contracts, so you pay a PREMIUM to buy The 2 nd Month contract. swaps

9 Commodity Investing & Academic Research A Diversified Basket of Commodity Futures Historically Has Shown:* 1) Total Returns and Volatility Comparable to Stocks and Bonds swaps 2) Low Long-Term Correlations to Stock and Bond Markets 3) High Correlation To Inflation * Gary Gorton and Geert Rouwenhorst: Facts and Fantasies About Commodity Futures

10 Getting Granular Diversified Commodities Total Returns Annual Total Return and Cumulative By Decade % % 80.00% 60s 70s 80s 90s 00s 10s 103.8% 894.1% 89.9% 73.7% 208.9% 14.7% 60.00% 40.00% 20.00% swaps 0.00% % % Source Data: SummerHaven Index Management

11 Commodities and Risk Risk Premium of Commodity Futures, Stocks and Bonds Annualized Monthly Returns 1959/7 2004/12 Commodity Futures Stocks Bonds Average Standard Deviation T-statistic Sharpe ratio % returns > * Gary Gorton & Geert Rouwenhorst: Facts and Fantasies About Commodity Futures

12 100% Commodity Correlations with Stocks and Bonds Rolling 1-year correlations with SP500 and L-T US Gov't Bonds 75% 50% 25% 0% % -50% -75% swaps Stocks Bonds Data from through Stocks are S&P Price Index, Bond data is constant maturity 10 year US Bonds until 1991 and Bloomberg/EFFAS 10+ year index subsequent to that.commodities is an equally weighted index of SDCI commodities. Source: SummerHaven Index Management

13 Long Term Correlation Of Spot Commodity Prices To Inflation Bonds = -.17 swaps US Stocks = -.04 Diversified Commodities = +.59 Source Data: SummerHaven Index Management

14 Commodity Spot Prices and Inflation by inflation regime, Source: SummerHaven Index Management

15 Looking Under the Hood: All Single Commodity Funds are not the Same So Ask YOURSELF Are You taking a Short-Term Position OR a Medium/Long-Term Position? Is Your Commodity In Backwardation or Contango Right Now?

16 Q: IF Your Client is an Active Trader, How Do You Pick and Choose Among Single Commodity ETFs? A: Look At Holding Period and Current Market Structure Backwardation Contango Short-Term Front-Month Futures ETF or Physical ETF Front-Month Futures Or Physical ETF swaps Long-Term Front-Month Futures ETF or Physical ETF Other Month Futures Or Physical ETF

17 For Asset Allocators, the Choice Of Benchmark Index is [almost] Everything 25.0% US Fixed Income, Large Cap Equity, and Commodities Indices Annual Total Return and Volatility % S&P 500 TR Return 15.0% 10.0% swaps 5.0% US FIXED INCOME US EQUITIES Russell 1000 TR MSCI US Large TR Barclays US Agg JPM US Agg FTSE US Gov Perf 0.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% (Source Data:Bloomberg) Risk

18 For Asset Allocators, the Choice Of Benchmark Index is [almost] Everything 20.0% US Fixed Income, Large Cap Equity, and Commodities Indices Annual Total Return and Volatility % 16.0% COMMODITIES S&P 500 TR Russell 1000 TR 14.0% MSCI US Large TR Barclays US Agg Return 12.0% 10.0% US FIXED INCOME 8.0% 6.0% swaps 4.0% US EQUITIES JPM US Agg FTSE US Gov Perf S&P GSCI TR DJ-UBS TR SDCI TR DBIQ Opt Yield Com. TR ROGR TR CCI TR 2.0% 0.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% (Source Data:Bloomberg) Risk

19 The Three Approaches to Commodity Indexing 1 st Generation Static Weightings To Each Commodity Always Own the 1 st /2 nd Month Contract 2 nd Generation Static Weightings to Each Commodity 3 rd Generation Own Across the Futures Curve swaps Dynamic Weighting to Each Commodity Own Across the Futures Curve

20 Active versus Passive Parting Thoughts Estimating Future Returns on Commodities Fooling Around with the Collateral and Hidden Leverage swaps The Future

21 Q & A swaps

22 Appendix

23 Is the Spot Price Return Better Than the Futures Return Over Time? It Depends On the Commodity and the Time Frame! Spot and Future Total Returns and Backwardation and Contango Spot Commodity Price Rolling Futures Contract Spot versus Futures Contract Commodity Total Change Change Annualized Total Return Return Annualized Annual Outperformance or Underperformance Wheat % 11.14% % -2.03% 13.17% Corn % 10.72% % -2.37% 13.09% Zinc % 9.19% 40.00% 3.42% 5.77% Canola Oil % 12.88% % 7.20% 5.67% Silver % 21.13% % 17.37% 3.76% Crude Oil-Brent % 14.58% % 10.89% 3.69% Sugar % 12.19% % 9.50% 2.69% Gold % 18.07% % 16.54% 1.53% Rubber % 24.49% % 22.97% 1.52% Soybeans % 10.91% % 10.82% 0.09% Palm Oil % 18.21% % 19.71% -1.50% Gasoil % 12.42% % 14.49% -2.07% Nickel % 13.58% % 17.45% -3.86% Platinum % 10.73% % 16.72% -6.00% Copper % 18.43% % 24.92% -6.49% Average % 14.58% % 12.51% 2.07% Source Data: Bloomberg, USCF

24 Inventories are signaled by price-based measures Backwardation = Low Inventories Contango = High Inventories Moving Average Oil Futures Basis versus Oil Inventories 13-month centralized Moving Averages 1/1991 6/ % 400 Basis (%) 25% 0% % Basis Inventories (Mbbl) -50% Inventories 250 Source: SummerHaven Index Management

25 Inventories are a fundamental driver of risk premiums 800 Cumulative Returns Inventory Sorted Portfolios Performance of Equally-weighted Portfolios 12/ /2006 Dec 1990 = Price Based Measures of Inventories: High Basis Performance of Equally-weighted Portfolios 12/ /2006 Dec 1990 = EW Index High Inventories Low Inventories EW Index High Basis Low inventories tend to cause an increase in expected future spot price volatility Long investors should expect to earn more to accept this greater price risk Inventories cannot be easily replenished, therefore higher risk premiums have a tendency to persist Low inventory levels are signaled by price-based measures * Gorton, Rouwenhorst, and Hayashi: The Fundamentals of Commodity Futures Returns

26 Long Term Total Returns of Commodities, Equities, and Fixed Income US LT Govt' Bonds TR S&P 500 EW Commodities TR Source: SummerHaven Index Management

27 Long Term Correlations of Diversified Commodities to Stocks and Bonds Commodities and Stocks = Commodities and Bonds = swaps Source Data: SummerHaven Index Management

28 Are US investment portfolios underweight or overweight commodities? Of approximately 15T of fund (mutual funds, ETFs, CEFs, UITs) assets in the United States, only 1% is represented by commodities. US portfolio allocations across financial markets Hybrid / Alternatives Commodities 1% Money Market Funds 21% 7% 33% US Equities 26% 12% Fixed Income Global Equities Source Data: ICI, Index Universe

29 120.00% 3 Year Rolling Returns Bonds % 80.00% 60.00% Negative Total Returns Positive Total Returns 40.00% 20.00% 0.00% % swaps % of all Time Periods % Source Data: SummerHaven Index Management, Bloomberg

30 160.00% 3 Year Rolling Returns Stocks % % % 80.00% Negative Total Returns Positive Total Returns 60.00% 40.00% 20.00% 0.00% swaps % % 15% of all Time Periods % Source Data: SummerHaven Index Management, Bloomberg

31 350.00% 3 Year Rolling Total Returns Equally Weighted Basket of Commodity Futures % % % % Negative Total Returns Positive Total Returns % 50.00% swaps 0.00% % % of all Time Periods Source Data: SummerHaven Index Management, Bloomberg

32 25.0% Average Annual Difference Between Highest and Lowest Index Total Return By Asset Class % 15.0% 10.0% 5.0% swaps 0.0% US Bonds US Stocks Commodities Source Data: Bloomberg, USCF