We have updated our privacy policy and terms & conditions. Find out more here.

Commodity Performance: Don't Forget The Roll Yield

By  |  Commodities  |  Dec 30, 2012 07:26AM GMT  |   Add a Comment
Commodity Performance: Don't Forget The Roll Yield
By   |  Dec 30, 2012 07:26AM GMT
In this last update of the year i take a look at the 2012 performances of some of the key commodities. When looking at the performances of commodities, which are all traded as futures contracts requiring a regular roll, the true performance is often not shown correctly due to the inability of charts to take into account the positive or negative roll yield between an expiring contract and the next. To highlight the difference that these rolls create in performance we have used the individual return on commodities in the DJ-UBS Index versus the return when using the first futures month, thereby ignoring the roll.

The DJ-UBS commodity index invests in the futures contract that is closest to expiration in order to achieve the greatest amount of liquidity and transparency. As a result futures position must frequently be rolled forward to the next contract. Not only does this lead to significant trading costs for the index but in addition the shape of the forward curve also impacts performance.

Contango and backwardation
In a situation where the forward price is higher than the current the index will accrue a loss as it is buying the next contract at a higher price than the one it is selling. This shape of the futures curve is called Contango and it occurs in a situation where ample supplies keep the spot price under pressure.

The opposite scenario is backwardation, which we currently see in Brent crude and gasoline, where tightness in the physical market raises the spot price above the forward price. This situation, which has become more frequent over the last year, creates a positive roll environment for the index and helps to improve the overall performance of the index.

Contango trap affects natural gas
The contango trap mentioned above has once again played havoc with natural gas as seen below. During 2012 the price of the front month contract has risen by 13 percent but when taking into account the steep contango of the futures curve the actual return from a long only investment with a monthly (negative) roll has actually been closer to minus 30 percent.

Another example is the difference in performance between WTI and Brent Crude. During the year brent crude has outperformed WTI by 11 percent when using the front month contracts. However if we take the roll yield, which is positive on brent (backwardation) and negative on WTI (contango) the difference is actually more than 20 percent.

The discrepancy is also relevant when taking a look at wheat and soybeans. Here the first futures contract describes a dead heat between the two but because soybeans' forward structure has been in backwardatation and wheat in contango the real return has varied greatly with soybeans returning 15 percent more than wheat.

Generally we find that the returns are more or less in line between the two methods which indicate little or no differnce in forward prices, an example of which is gold and silver. It should also be mentioned that some of the difference in performance between the two methods is due to the fact that futures invested by the DJ-UBS Index are always rolled during a specific time period which is often a couple of weeks before expiry or first notice. As the generic first future month rolls just ahead of the expiry or first notice this time the difference may create a small variation in performance.

But as we enter 2013 and new investment decisions are about to be made investors who are potentially looking for a passive long only investment through one of many different commodity index funds should be aware of the potential impact on performance of the shape of the individual forward curves.
Disclaimer: NON-INDEPENDENT INVESTMENT RESEARCH This investment research has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Further it is not subject to any prohibition on dealing ahead of the dissemination of investment research. Saxo Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. None of the information contained herein constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy. This material is produced for marketing and/or informational purposes only and Saxo Bank A/S and its owners, subsidiaries and affiliates whether acting directly or through branch offices (“Saxo Bank”) make no representation or warranty, and assume no liability, for the accuracy or completeness of the information provided herein. In providing this material Saxo Bank has not taken into account any particular recipient?s investment objectives, special investment goals, financial situation, and specific needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Bank assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation. All investments entail a risk and may result in both profits and losses. In particular investments in leveraged products, such as but not limited to foreign exchange, derivates and commodities can be very speculative and profits and losses may fluctuate both violently and rapidly. Speculative trading is not suitable for all investors and all recipients should carefully consider their financial situation and consult financial advisor(s) in order to understand the risks involved and ensure the suitability of their situation prior to making any investment, divestment or entering into any transaction. Any mentioning herein, if any, of any risk may not be, and should not be considered to be, neither a comprehensive disclosure or risks nor a comprehensive description such risks. Any expression of opinion may be personal to the author and may not reflect the opinion of Saxo Bank and all expressions of opinion are subject to change without notice (neither prior nor subsequent). Trade Currency and Price Currency When an investor trades in the Forex market, they always trade a combination of two currencies (a cross or currency pair) in which one currency is bought (long) and the other is sold (short). This means the investor is speculating on the prospect of one of the currencies appreciating in value in relation to the other. Forex Margin Trading Margin trading allows investors to buy and sell assets that have a greater value than the capital in their account. Forex trading is typically executed on margin accounts, and the industry practice is to trade on relatively small margin amounts since currency exchange rate fluctuations tend to be less than one or two percent on any given day. Margin trading does involve a certain amount of risk. Since a position is being held that exceeds the actual value of the account, a trader could incur substantial losses if the market moves against his position. Thus, margin trading requires close monitoring of margin utilization, i.e. the amount of collateral being used to hold margined positions. If margin utilization exceeds collateral available for margin trading, positions must be closed, reduced, or additional funds must be posted to cover the position. This publication refers to past performance. Past performance is not a reliable indicator of future performance. Indications of past performance displayed on this publication will not necessarily be repeated in the future. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. Statements contained on this publication that are not historical facts and which may be simulated past performance or future performance data are based on current expectations, estimates, projections, opinions and beliefs of the Saxo Bank Group. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this publication may contain 'forward-looking statements'. Actual events or results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. This material is confidential and should not be copied, distributed, published or reproduced in whole or in part or disclosed by recipients to any other person. Any information or opinions in this material are not intended for distribution to, or use by, any person in any jurisdiction or country where such distribution or use would be unlawful. The information in this document is not directed at or intended for “US Persons” within the meaning of the United States Securities Act of 1993, as amended and the United States Securities Exchange Act of 1934, as amended. The Saxo Bank Group is under the supervision of the Danish Financial Supervisory Authority (In Danish: "Finanstilsynet") and is subject to the Danish Executive Order on Good Business Practice for Financial Undertakings. Saxo Bank A/S Philip Heymans Allé 15 2900 Hellerup Denmark Phone: +45 39 77 40 00 Reg. No. 1149 CVR. No. 15731249
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data .

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Add a Comment


Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Are you sure you want to delete this chart?
Are you sure you want to delete this chart?

Successfully Reported

Thank you. This comment has been flagged for a moderator.