Bloomberg commodities index still in contango

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grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Wed Mar 21, 2018 6:26 pm

jalbert wrote:
Wed Mar 21, 2018 1:38 pm
Intuitively though that fits with my mental model of when i want to invest in commodity futures. i.e. when Commodity producers (think corn farmers) are worried about falling prices, the curve is in backwardation, they are willing to pay up for price insurance for the coming harvest and i am selling it to them. and then as events play out corn prices "do" fall but not as much as was feared and i make money off the roll.
Or they fall further than projected. On average, I think it will balance out, and the long term expected real return of commodities is zero.
right that is definitely a possibility. I would agree that for spot prices the long term expected real return is zero. One could even make an argument i suppose that for spot prices the expected real return is negative due to technological improvements etc (easier to grow corn, etc.)

the question is whether the commodity futures curve being in backwardation is a reliable signal that there are "risk premia" to be had in the commodities futures market. I don't know the answer. I certainly wouldn't bet more than 5% of my risk portfolio on such a bet. Vanguard for example has a 5% allocation in the Vanguard managed payout fund to commodity futures. that level seems to me like it could be appropriate. But i personally wouldn't make that bet now with commodities broadly in contango.
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jalbert
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Re: Bloomberg commodities index still in contango

Post by jalbert » Thu Mar 22, 2018 1:01 am

My belief is that the expected real return of a commodities investment is zero whether or not futures contracts are used. Including a small stake in commodities in a portfolio likely reduces volatility. I think the only source of positive real return is a rebalancing premium.
Risk is not a guarantor of return.

psteinx
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Re: Bloomberg commodities index still in contango

Post by psteinx » Thu Mar 22, 2018 1:37 pm

grok87 wrote:
Wed Mar 21, 2018 6:26 pm
right that is definitely a possibility. I would agree that for spot prices the long term expected real return is zero. One could even make an argument i suppose that for spot prices the expected real return is negative due to technological improvements etc (easier to grow corn, etc.)
I would say that, in fact, it's PROBABLE that the the long term real price of the average physical commodity is negative.

Inflation is roughly the sum of inflation on physical goods and on services. The latter has a higher labor component, and, IMO, is less subject to productivity improvements. Prices of physical stuff in general are likely, IMO, to increase (nominally) at less than the total (services included) rate of inflation.

I would think that if you looked at most of the important agricultural yields, they've increased sharply over most long measured horizons (a decade or three, or the last century). One might think that for mined/drilled commodities (gold, iron, oil, etc.) that depletion would cause real prices to increase. I'm on less firm ground here - speculative - but I suspect that most of these are holding close to even or decreasing in real prices. Yes, the readily accessible stuff (closer to the surface) depletes, but I suspect that technology & technique improvements over time (i.e. fracking, etc.) more than offset this...

EDIT: Tweaked some.

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Sat Apr 07, 2018 7:21 am

april report is out
https://data.bloomberglp.com/promo/site ... utlook.pdf
as page 18 the index is still in contango, in fact it is getting worse, now at -3.3% vs -1.8% last month (negative means contango , positive backwardation)

(energy though has moved into more backwardation at 5.1% vs 4.5% last month. )

so i'm still staying away for now...
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grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Sun May 06, 2018 7:27 am

may report is out
https://data.bloomberglp.com/promo/site ... utlook.pdf

as per page 5 the index is still in contango at -2.3%
energy however is in backwardation

to paraphrase Aragorn in LOTR- "a day may come [when it is time to invest in a broad commodity index]..but it is not this day"
https://www.youtube.com/watch?v=EXGUNvIFTQw
:)

my current thinking on commodities is as follows:
1) it may be a long wait but eventually i think the broad commodity index will move into backwardation
2) at that point i think investing in commodities is going to seem like the stupidest thing in the world to do.
3) i'm hoping i have the discipline to do it anyway based on this thread

cheers,
grok
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lack_ey
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Re: Bloomberg commodities index still in contango

Post by lack_ey » Sun May 06, 2018 10:43 am

Do you have good insights or studies on actually how predictive the term structure generally is of forward return for commodity futures? To some degree the curve can represent changing expectations of future spot prices, and it's not an indication of a risk premium on one side or the other.

I recall seeing this:

Image

https://www.aqr.com/-/media/AQR/Documen ... ptions.pdf

The carry predictor there is based on the term structure. I mean, it looks predictive if maybe not statistically significantly so under many assumptions, maybe not so much that it's worth using for market timing so heavily. I suppose where there is a known causal mechanism you don't need the empirical evidence to be as strong to be sufficiently convinced of something, but it's not that amazing here.

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Sun May 06, 2018 1:17 pm

lack_ey wrote:
Sun May 06, 2018 10:43 am
Do you have good insights or studies on actually how predictive the term structure generally is of forward return for commodity futures? To some degree the curve can represent changing expectations of future spot prices, and it's not an indication of a risk premium on one side or the other.

I recall seeing this:

Image

https://www.aqr.com/-/media/AQR/Documen ... ptions.pdf

The carry predictor there is based on the term structure. I mean, it looks predictive if maybe not statistically significantly so under many assumptions, maybe not so much that it's worth using for market timing so heavily. I suppose where there is a known causal mechanism you don't need the empirical evidence to be as strong to be sufficiently convinced of something, but it's not that amazing here.
thanks.
i wonder why it is important to have an equal volatility weighted portfolio of commodities?

i think i agree with your point ("To some degree the curve can represent changing expectations of future spot prices, and it's not an indication of a risk premium on one side or the other.")
if i was super convinced that backwardation was the key to everything i would be buying some sort of oil/energy commodity fund right now- if there were any cheap ones that don't issue k-1s.

but i think may come a day when people throw in the towel on commodities and everything moves into backwardation. we'll see i guess...
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lack_ey
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Re: Bloomberg commodities index still in contango

Post by lack_ey » Sun May 06, 2018 1:33 pm

grok87 wrote:
Sun May 06, 2018 1:17 pm
i wonder why it is important to have an equal volatility weighted portfolio of commodities?
It's not so much important as their baseline portfolio for evaluation. I suppose it would be diversified by risk, most so if correlations were equal (which is not true).

How would you weight commodities? Some kind of production weighting? Or modified with caps? Equal weighting? BCOM has the arbitrary caps of min 2% / max 15% for a single commodity and no sector above 33%.

Weighting is always a big question when evaluating commodities.

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Mon May 07, 2018 5:02 pm

lack_ey wrote:
Sun May 06, 2018 1:33 pm
grok87 wrote:
Sun May 06, 2018 1:17 pm
i wonder why it is important to have an equal volatility weighted portfolio of commodities?
It's not so much important as their baseline portfolio for evaluation. I suppose it would be diversified by risk, most so if correlations were equal (which is not true).

How would you weight commodities? Some kind of production weighting? Or modified with caps? Equal weighting? BCOM has the arbitrary caps of min 2% / max 15% for a single commodity and no sector above 33%.

Weighting is always a big question when evaluating commodities.
Agree.
Weighting based on volatility seems to be an aqr thing though. Maybe it is a hedge fund thing? It goes along with their volatility targeting approach in general.

I think its problematic on a couple of levels.

1) it's the wrong measure of risk. I care about downside risk (what i can lose) not standard deviation (sd). Distributions in investing are almost never normally distributed so volatility (sd) tells you nothing about downside risk. Either they inherently have fat tails (like stocks) or investments like hedge funds are engineered to have low standard deviation but high blow up risk.

2) market value is a good measure of risk for stocks and stock indexes. For individual stocks i figure i can lose the whole thing. For stock indices i figure i can lose half.

3) the problem with using volatility to weight anything is that when it goes up you are a forced seller. And that can create a death spiral. It's going to be like the role of portfolio insurance in the 1987 crash all over again.
https://www.nytimes.com/2012/10/19/busi ... treet.html

Don't mean to preach stuff you already know. For the benefit of others who are reading...
:)
Cheers,
Grok
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grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Tue Jun 05, 2018 12:58 pm

June report is out not.
https://data.bloomberglp.com/promo/site ... utlook.pdf

Not much change from last month. Broad market in contango of -2%.
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Dudley
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Re: Bloomberg commodities index still in contango

Post by Dudley » Thu Jun 07, 2018 6:31 am

grok87 wrote:
Tue Jun 05, 2018 12:58 pm
June report is out not.
https://data.bloomberglp.com/promo/site ... utlook.pdf

Not much change from last month. Broad market in contango of -2%.
Grok : And if at some point you did decide to put money into commodities exactly which funds would you choose ? Many have either high fees or have nuisance K1s. Those that do not are small funds and hence suffer from light volume and risk of closure.

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Thu Jun 07, 2018 10:18 am

Dudley wrote:
Thu Jun 07, 2018 6:31 am
grok87 wrote:
Tue Jun 05, 2018 12:58 pm
June report is out not.
https://data.bloomberglp.com/promo/site ... utlook.pdf

Not much change from last month. Broad market in contango of -2%.
Grok : And if at some point you did decide to put money into commodities exactly which funds would you choose ? Many have either high fees or have nuisance K1s. Those that do not are small funds and hence suffer from light volume and risk of closure.
Hi Dudley,
Good question. So far the most interesting fund i’ve Found that appears to address both your concerns is bcd or maybe bci

http://www.etf.com/BCD

What do you think?
Cheers,
Grok
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Dudley
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Re: Bloomberg commodities index still in contango

Post by Dudley » Thu Jun 07, 2018 12:59 pm

The big problem I see with BCD (I actually have a teeny bit in it..) is that it only has $4M AUM. Liquidity/spread aside who knows how long their managers will keep it alive if it doesn't grow.

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Thu Jul 26, 2018 6:35 am

July report is out
https://data.bloomberglp.com/profession ... -July1.pdf
See page 18 for backwardation/contango

Broad index still in contango at -2.3%

Ie still not time to invest in commodities yet.

But energy in backwardation at 6%
Livestock also at +4.1%

Rest in contango
Industrial metals -0.3%
Precious metals -3.0%
Agriculture -7.5%

Cheers,
Grok
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grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Sat Aug 04, 2018 11:06 am

still not time to invest in commodities.

https://data.bloomberglp.com/promo/site ... utlook.pdf

see page 15. broad commodities index is in contango of -3.6% which is 1.4% points worse than where it was last month.

that being said i still think the situation is worth monitoring with all the uncertainty and volatility internationally.

cheers,
grok
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Re: Bloomberg commodities index still in contango

Post by boglerdude » Sat Aug 04, 2018 9:43 pm

DBC is actively managed, they adjust for contango?

http://www.etf.com/DBC

desafinado
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Re: Bloomberg commodities index still in contango

Post by desafinado » Sun Aug 05, 2018 12:35 am

I think I understand why expected real return for ags/softs spot should be zero or negative but I'm not sure I understand why that's the case for the fossil fuel complex or possibly metals? Obviously in the energy space you can substitute for fossil fuels but there are some places where you can't...

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market timer
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Re: Bloomberg commodities index still in contango

Post by market timer » Sun Aug 05, 2018 1:31 am

What is the idea behind waiting for backwardation? I haven't seen where this has any predictive power for returns.

Some commodities that are cheap to store and have low consumption, such as gold, rarely trade in backwardation. Contango in the gold market arises from the cost of capital. The forward curve of gold is basically the future value of the spot price, extrapolated using the risk-free rate. This relationship is maintained through arbitrage.

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Sun Aug 05, 2018 7:11 am

boglerdude wrote:
Sat Aug 04, 2018 9:43 pm
DBC is actively managed, they adjust for contango?

http://www.etf.com/DBC
not sure i trust the idea of active management. and the e.r. is 0.88%
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grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Sun Aug 05, 2018 7:27 am

market timer wrote:
Sun Aug 05, 2018 1:31 am
What is the idea behind waiting for backwardation? I haven't seen where this has any predictive power for returns.

Some commodities that are cheap to store and have low consumption, such as gold, rarely trade in backwardation. Contango in the gold market arises from the cost of capital. The forward curve of gold is basically the future value of the spot price, extrapolated using the risk-free rate. This relationship is maintained through arbitrage.
see this post upthread and ensuing discussion
viewtopic.php?f=10&t=243986#p3828240
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Re: Bloomberg commodities index still in contango

Post by Valuethinker » Sun Aug 05, 2018 9:49 am

desafinado wrote:
Sun Aug 05, 2018 12:35 am
I think I understand why expected real return for ags/softs spot should be zero or negative but I'm not sure I understand why that's the case for the fossil fuel complex or possibly metals? Obviously in the energy space you can substitute for fossil fuels but there are some places where you can't...
Remember though it is demand at the margin which shifts price. If a meaningful proportion of cars shift to EVs, or even to natural gas,. That hits the oil price.

Oil is a very energy dense, valuable feedstock. Aviation fuel does not have easy substitutes. The floor price of oil in the long run tends to be the new supplies at the margin. Oil sands, deep offshore, fracking. Say 60 to 80 dollars a barrel. But small shifts in usage will tend to push prices down.

Natural gas is not particularly valuable per unit. But it's the likely substitutefor coal for electricity and heating. A growth fuel at least in the short to medium term. Main constraint is not supply but transport location and capacity.

Coal is a shrinking fuel. See the capacity factors on Indian powerplants which are dreadful. It's unlikely even the new capacity in emerging markets will fully offset shrinkage in developed countries.

Because of the high fixed cost nature of the fossil fuels industry, lost demand can provoke disproportionate falls in price.

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Re: Bloomberg commodities index still in contango

Post by nedsaid » Sun Aug 05, 2018 6:48 pm

grok87 wrote:
Sat Aug 04, 2018 11:06 am
still not time to invest in commodities.

https://data.bloomberglp.com/promo/site ... utlook.pdf

see page 15. broad commodities index is in contango of -3.6% which is 1.4% points worse than where it was last month.

that being said i still think the situation is worth monitoring with all the uncertainty and volatility internationally.

cheers,
grok
Well, I would say the returns from Commodity funds are very discouraging. I noticed that in the Fidelity Funds network that the best 10 year returns were a -6.41% annual return. No thank you.
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Re: Bloomberg commodities index still in contango

Post by Theoretical » Mon Aug 06, 2018 4:38 am

grok87 wrote:
Sun Aug 05, 2018 7:11 am
boglerdude wrote:
Sat Aug 04, 2018 9:43 pm
DBC is actively managed, they adjust for contango?

http://www.etf.com/DBC
not sure i trust the idea of active management. and the e.r. is 0.88%
The better one is PDBC which is actively managed on the collateral and uses a wholly owned Cayman sub to make it a ‘40 Act fund with no K-1. It’s .59 now. There’s several other cotango managed ETFs that are much cheaper than PDBC while also being 1988

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Mon Aug 06, 2018 4:57 am

Theoretical wrote:
Mon Aug 06, 2018 4:38 am
grok87 wrote:
Sun Aug 05, 2018 7:11 am
boglerdude wrote:
Sat Aug 04, 2018 9:43 pm
DBC is actively managed, they adjust for contango?

http://www.etf.com/DBC
not sure i trust the idea of active management. and the e.r. is 0.88%
The better one is PDBC which is actively managed on the collateral and uses a wholly owned Cayman sub to make it a ‘40 Act fund with no K-1. It’s .59 now. There’s several other cotango managed ETFs that are much cheaper than PDBC while also being 1988
thanks that does look interesting. so PDBC is a sister fund to DBC?
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Theoretical
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Re: Bloomberg commodities index still in contango

Post by Theoretical » Mon Aug 06, 2018 5:34 am

Yes, because what it does to avoid being a commodity pool is (1) actively manage the collateral and (2) hold the commodities in question in a Cayman sub. The commodity part is pretty-strictly index.

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Re: Bloomberg commodities index still in contango

Post by Dudley » Mon Aug 06, 2018 5:52 am

what do you think of CMDY ? (iShares, new so currently low vol and AUM, er=0.28%, no K1)

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Mon Aug 06, 2018 6:18 am

Dudley wrote:
Mon Aug 06, 2018 5:52 am
what do you think of CMDY ? (iShares, new so currently low vol and AUM, er=0.28%, no K1)
i like the low expense ratio. it's hard to understand this fund's strategy. i think it is actively managed? on both the commodities side and the collateral? would prefer and index approach on the commodities
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Theoretical
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Re: Bloomberg commodities index still in contango

Post by Theoretical » Mon Aug 06, 2018 7:52 am

This one is the one you’re looking for. Index futures and active collateral. .29%

BCI

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Mon Aug 06, 2018 7:57 am

Theoretical wrote:
Mon Aug 06, 2018 7:52 am
This one is the one you’re looking for. Index futures and active collateral. .29%

BCI
thanks, much appreciated. i think this fund was mentioned upthread as well...
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Dudley
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Re: Bloomberg commodities index still in contango

Post by Dudley » Mon Aug 06, 2018 7:59 am

I have a tiny bit of BCI and BCD. I think the big problem with BCI, BCD and CMDY is volume is so low. I wonder if anyone will offer them commission free. Also with low AUM if they don't grow I feel risk is they get closed out. I would be inclined to spread any purchase of commodity over multiple funds.

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Thu Aug 09, 2018 5:10 am

Dudley wrote:
Mon Aug 06, 2018 7:59 am
I have a tiny bit of BCI and BCD. I think the big problem with BCI, BCD and CMDY is volume is so low. I wonder if anyone will offer them commission free. Also with low AUM if they don't grow I feel risk is they get closed out. I would be inclined to spread any purchase of commodity over multiple funds.
yes this happened to me. i used to own CSCR and it got closed out.
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Re: Bloomberg commodities index still in contango

Post by ReformedSpender » Thu Aug 09, 2018 7:50 am

Fun with numbers - total returns over the last 7 years:
Nasdaq 100: +289%
S&P 500: +193%
Bloomberg Commodity Index: -43%

:beer
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

grok87
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Re: Bloomberg commodities index still in contango

Post by grok87 » Thu Aug 09, 2018 7:54 am

ReformedSpender wrote:
Thu Aug 09, 2018 7:50 am
Fun with numbers - total returns over the last 7 years:
Nasdaq 100: +289%
S&P 500: +193%
Bloomberg Commodity Index: -43%

:beer
thanks
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Re: Bloomberg commodities index still in contango

Post by Sammy_M » Wed Aug 22, 2018 1:27 pm

Bumping this thread. BCD looks very interesting given the 0.29% ER and longer-dated futures to reduce roll impacts (both + and -).

What are the issues with investing in a fund with low AUM if you hold in tax-advantaged and use a limit order set near the intraday indicative value?

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Re: Bloomberg commodities index still in contango

Post by Dudley » Wed Aug 22, 2018 6:28 pm

re BCD : Volume is very low. Now its a free trade at Vanguard could help by breaking order up into smaller chunks. But I'm wary of stability/lifetime of such a small fund.

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Re: Bloomberg commodities index still in contango

Post by grok87 » Thu Aug 23, 2018 6:05 am

Sammy_M wrote:
Wed Aug 22, 2018 1:27 pm
Bumping this thread. BCD looks very interesting given the 0.29% ER and longer-dated futures to reduce roll impacts (both + and -).

What are the issues with investing in a fund with low AUM if you hold in tax-advantaged and use a limit order set near the intraday indicative value?
well i think most commodities are still in contango. so there is likely to be a negative roll impact even with a longer dated futures fund, just delayed?
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Sammy_M
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Re: Bloomberg commodities index still in contango

Post by Sammy_M » Thu Aug 23, 2018 7:24 pm

grok87 wrote:
Thu Aug 23, 2018 6:05 am
well i think most commodities are still in contango. so there is likely to be a negative roll impact even with a longer dated futures fund, just delayed?
Fewer rolls though?

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Re: Bloomberg commodities index still in contango

Post by grok87 » Thu Aug 23, 2018 7:26 pm

Sammy_M wrote:
Thu Aug 23, 2018 7:24 pm
grok87 wrote:
Thu Aug 23, 2018 6:05 am
well i think most commodities are still in contango. so there is likely to be a negative roll impact even with a longer dated futures fund, just delayed?
Fewer rolls though?
yes i suppose you're right.
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Re: Bloomberg commodities index still in contango

Post by grok87 » Sun Oct 14, 2018 9:40 am

latest data out, october report, data as of end of september
https://data.bloomberglp.com/promo/site ... utlook.pdf

bloomberg commodity index still shows material contango at -3.1%. so not time to buy collateralized commodity futures (CCF) yet.
see page 21
cheers,
grok
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