Commodities

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Commodities are marketable items produced to satisfy wants or needs. Economic commodities comprise goods and services.[1]

Regulatory

The Commodity Futures Trading Commission (CFTC) is the federal government agency that regulates the commodity futures, commodity options, and swaps trading markets.[2][note 1]

The Commission was established as an independent agency in 1974, assuming responsibilities that had previously belonged to the Department of Agriculture since the 1920s. The Commission historically has been charged by the CEA with regulatory authority over the commodity futures markets. These markets have existed since the 1860s, beginning with agricultural commodities such as wheat, corn, and cotton.

Over time, these commodity futures markets, known as designated contract markets (DCMs) regulated by the Commission, have grown to include those for energy and metals commodities such as crude oil, heating oil, gasoline, copper, gold, and silver. The agency now also oversees DCMs for financial products such as interest rates, stock indexes, and foreign currency.

Risks

Role in a portfolio

Commodity spot prices, as an asset class, do not generate a real return. Commodity mutual funds and ETF's invest in futures contracts that derive excess returns over the risk free rate of return from two sources:

  1. Changes in futures prices
  2. The roll yield—which can be either positive or negative—that results from replacing an expiring contract with a further out contract in order to avoid physical delivery yet maintain positions in the futures markets. [3]


Table 1. Commodity Index Returns [4]


(View Google Spreadsheet in browser, then File --> Download as to download the file.)

Funds

Open-ended mutual funds

ETFs

ETNs

Notes

  1. A commodity is defined as:
    (1) A commodity, as defined in the Commodity Exchange Act, includes the agricultural commodities enumerated in Section 1a(9) of the Commodity Exchange Act, 7 USC 1a(9), and all other goods and articles, except onions as provided in Public Law 85-839 (7 USC 13-1), a 1958 law that banned futures trading in onions, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in; (2) A physical commodity such as an agricultural product or a natural resource as opposed to a financial instrument such as a currency or interest rate.
    See: CFTC Glossary
  2. Bloomberg took over the maintenance of the Dow Jones-UBS Commodity Index on July 1, 2014. See Bloomberg Indexes to Oversee Leading Global Commodity Indexes.

References

External links

Articles

Bibliography

White papers
Academic papers