Raw materials in this article
• Private investors have several options for investing in commodities
• Rolling losses and high storage costs can severely affect returns
• Commodity investments are not for beginners
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Due to low interest rates, volatile stock markets and a possible increase in inflation, investments in commodities are becoming increasingly popular, especially among private investors. There are almost no limits to the imagination, because with the help of modern financial products, investors can now invest in almost any commodity.
A variety of options for private investors
In principle, private investors can acquire any classic commodity without a derivative financial product, but it most likely makes no sense to store several barrels of crude oil or dozens of sacks of soybeans in their own garden. Accordingly, the stock exchange offers a variety of different options for indirectly participating in the performance of a wide variety of commodities.
Investors who want to diversify their portfolio with commodities can buy shares in common commodities groups, such as mining companies, agricultural companies and oil explorers, as well as funds, ETFs and ETCs and certificates that track the price development of an individual commodity or an entire commodity replicate the basket of raw materials.
Beware of high storage costs…
While classic commodity stocks do not produce any further ongoing costs in the portfolio and, if lucky, even pay out a high dividend, commodity funds, ETFs and certificates usually incur high fees, which can extremely reduce returns from rising commodity prices in the long term.
Many investors are often not aware that the providers of commodity ETFs, funds and ETCs, who hold the individual commodities in physical form in order to back the issued security with an actual quantity of a specific commodity, bear high storage costs to have.
For this reason, investors should give sufficient thought to the nature of the individual raw materials before investing. Because while one million euros in gold fits into almost any conventional backpack, one million euros in crude oil at the current oil price requires well over 20,000 barrels, each with a capacity of one barrel or 159 liters. Thus, the price per volume unit of a raw material has a significant impact on the respective storage costs, which represent a cost factor that should not be underestimated.
…or rolling losses
However, not all commodity funds, ETFs and ETCs offer a physical claim to the underlying asset. With so-called synthetic ETFs, only the price developments are represented by futures contracts. Such contracts, which can be traded by institutional investors on the futures exchange, reflect the market prices for goods that are bought today but only delivered in the future. In contrast to a direct investment in the physical commodity, however, these futures contracts expire after a certain period of time, so that they have to be renewed constantly. For example, the provider of a synthetic commodity ETF must constantly exchange the respective contracts that reflect the price development of the underlying asset. This often leads to so-called rolling losses, which depend on the expected future price development and the current storage costs for the respective raw material.
If investors only follow the daily updated price quotations of the individual commodities and do not get a precise picture of how high the rollover losses are within the individual financial products, the real returns on a commodity investment can deviate extremely greatly from the personally expected performance. Investors who want to participate in the long-term price development of various commodities with the help of synthetic ETFs should definitely keep an eye on the prices of the underlying futures contracts.
Contango vs. backwardation
Whether a commodity investor incurs a roll loss or even a roll profit depends on the course of the so-called futures curve. As a rule, however, the situation on the commodity futures exchange is such that the futures prices are quoted above the spot prices or the spot price, so that a later delivery date entails higher costs. This situation, which is also known as contango, leads to rolling losses for private investors.
Although the contango situation describes the normal case, the price situation on the commodity futures exchanges can also develop in such a way that the forward rate is quoted below the current spot rate. In such a situation, which is referred to as backwardation, the investor would achieve a roll profit, since the futures curve is sloping downwards and the respective commodity can be purchased at a cheaper price in the future.
Depending on the raw material, the corresponding rolling losses or rolling profits can vary greatly. Consequently, it is usually the case that precious metals, such as gold and silver, often show a smaller difference between the individual futures contracts than commodities, which are heavily dependent on the economic situation or the weather. Accordingly, the long-term performance difference between a synthetic gold ETF and the price of gold is never as extreme as the difference between a synthetic oil ETF and the price of crude oil.
Better safe than sorry
As always, when it comes to the subject of money and investments, as a private investor you should of course deal with the matter sufficiently and be sufficiently informed, even when it comes to commodity investments. Especially when investing in commodities, there are many stumbling blocks lurking for inexperienced investors that can quickly turn a supposedly good investment into a yield killer.
Pierre Bonnet / finanzen.net
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