By Michael Johnston of ETF DatabaseExchange-traded commodity products have been embraced by investors eager to add an asset class to their portfolio that has historically exhibited a low correlation to stocks and bonds. Commodity ETPs saw more than $30 billion in cash inflows last year as both funds targeting diversified baskets of resources and commodity-specific funds surged in popularity. As the use of exchange-traded commodity products has become more common, investors have become more educated on the nuances of various strategies. While some commodity products physically buy and hold the underlying resources, the majority utilize a futures-based strategy to achieve exposure. While futures-based funds exhibit a strong correlation with spot prices of the related commodities, there are other factors that can have a potentially significant impact on overall returns. >>Want More ETFs? Visit Our ETF Screener Page When futures markets are in contango (i.e., near-dated futures are cheaper than longer-dated contracts), the process of rolling contracts approaching expiration can eat into investor returns. If an exchange-traded product rolls its holdings frequently enough, the "roll yield" can account for a significant portion of the total return, and has the potential to create a drag on an investment. This scenario isn't just hypothetical; in 2009, UNG lost more than 55% of its value, despite the fact that spot natural gas prices finished the year about where they began. The nuances of futures-based investment strategies have frustrated some investors who have come to the conclusion that a return drag is inevitable. But a futures-based strategy doesn't always work against investors. When futures markets are in backwardation, near-dated contracts are more expensive than long-dated contracts. This creates the potential for investors to pick up excess return in the roll process (although any gain can obviously be negated by the anticipated decline in prices). Earlier this month, we took a look at commodity ETFs facing steep futures curves (see Three ETFs That Contango Could Crush). Below, we profile three commodity products that could potentially generate a positive roll yield in coming months, selling relatively expensive futures to buy less expensive contracts.
3. United States Gasoline Fund ( UGA)
2. iPath Dow Jones-UBS Sugar Total Return ETN ( SGG)
1. iPath Dow Jones-UBS Livestock Total Return ETN ( COW)