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Commodity index investing and commodity futures prices

Октябрь 2, 2012

commodity index investing and commodity futures prices

agricultural futures markets. Based on new data and empirical analysis, the study finds that index funds did not cause a bubble in commodity futures prices. A standard theory used to explain commodity futures prices decomposes the futures price into commodity index investing (where investors seek. Index funds replicating a given commodity index – thus following passive investment strategies involving mainly the purchase of futures. ZURICH CLASSIC GOLF BETTING

These are highly volatile and complex investments that are generally recommended for sophisticated investors only. Another way to gain exposure to commodities is through mutual funds that invest in commodity-related businesses. For instance, an oil and gas fund would own stocks issued by companies involved in energy exploration, refining, storage, and distribution. Commodity stocks vs. Not necessarily. There are times when one investment outperforms the other so maintaining an allocation to each group might help contribute to a portfolio's overall long-term performance.

Advantages of commodity investing Diversification Over time, commodities and commodity stocks tend to provide returns that differ from other stocks and bonds. A portfolio with assets that don't move in lockstep can help you better manage market volatility. However, diversification does not ensure a profit or guarantee against loss.

Potential returns Individual commodity prices can fluctuate due to factors such as supply and demand, exchange rates, inflation, and the overall health of the economy. In recent years, increased demand due to massive global infrastructure projects has greatly influenced commodity prices.

In general, a rise in commodity prices has had a positive impact on the stocks of companies in related industries. Potential hedge against inflation Inflation—which can erode the value of stocks and bonds—can often mean higher prices for commodities. While commodities have shown strong performance in periods of high inflation, investors should note that commodities can be much more volatile than other types of investments.

Risks of commodity investing Principal risk Commodity prices can be extremely volatile and the commodities industry can be significantly affected by world events, import controls, worldwide competition, government regulations, and economic conditions, all of which can have an impact on commodity prices. They construct a dataset of returns on individual commodity futures going back as far as Investment returns are computed by "rolling" positions in individual futures contracts forward over time.

Commodities are combined into an equally weighted index; much of the paper is concerned with the behavior of this index. Historically, the average return on the equally weighted index of commodity futures has exceeded the return on T-Bills by about 5 percent per annum.

The relatively low volatility of the commodity index stems from the fact that the pair-wise correlations between individual commodities are relatively low. Commodities are also less risky by other standards. First, the distribution of commodity returns is skewed right, whereas equity return distributions are skewed left. In other words, relative to a normal "bell-shape" curve, equities experience proportionally more crashes, whereas the "crashes" in commodities occur most often on the upside, leading to positive returns to investors.

Further, Gorton and Rouwenhorst show that commodities have the ability to diversify portfolios of stocks and bonds. The sources of the diversification benefits are the ability of commodities to provide a hedge against inflation - stocks and bonds are poor hedges by comparison - and to ly offset the cyclical variation in the returns of stocks and bonds.

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Trader's Edge: Commodities \u0026 Commodity Indexes


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Index Basics: Commodities – How Spot Prices Impact Futures Prices

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