How to Hold On for Commodities’ Wild Ride

The brutal summer has continued to bring devastation to corn, soybeans and other staples, causing food prices to rise and roiling global commodities markets.

The pureplay Teucrium Corn Fund, (CORN) for example, has risen a further 5% in the past month, following a 25% spike which AdvisorOne reported the previous month, thus upending traders who assumed prices would not rise above corn’s $8-per-bushel peak in July. As of Tuesday, the daily price of corn reached $8.58, representing a 25% increase year to date.

Experience teaches that the vagaries of drought, flood, disease and pests are entirely unpredictable, which is why individual commodity investing is considered high risk and really more akin to a bet.

And the demand side is similarly unpredictable, since supply shortages and their consequent price increases induce greater consumption of commodity substitutes that have decreased in price. (Lamb and beef prices have fallen this year, for example, and some industrial producers likewise have the ability to shift production inputs.)

So, to avoid commodities’ wild ride, while gaining their investment benefits, which include their noncorrelation with equities and stock-like returns, many investors favor ownership of broad-based commodities futures indexes.

The best known index in the space is probably the Dow Jones-UBS Commodities Index, and retail funds based on this index include the popular PIMCO Commodity Real Return Strategy Fund (PCRIX). The other primary index in the space is the Goldman Sachs Commodity Index, and a popular ETF that tracks that index is the iShares S&P GSCI Commodity-Indexed Trust (GSG).

But an article in the July/August issue of the Journal of Indexes, called Better Beta in Commodities Indexing, discusses a little-known index with long-term performance more than double that of either the Dow Jones-UBS or Goldman Sachs indexes. That index is the Longview Extended Commodities Index, which is available to retail investors through the Arrow Commodity Strategy Fund (CSFFX).

The author of the Journal of Indexes article, Jonathan Guyer, is an interested party. Guyer (left) is the principal and chief investment officer and portfolio manager of the Longview index. But the results he reports do not appear to be the usual ballyhooed superiority claims that are typical for the investment industry since Longview’s long-term results stand out rather dramatically from its competition, precisely as the index (whose name, “Longview,” is intended to convey its long-term focus) is designed to do.

In the 10 years ending June 30, the Longview Extended Commodity Index generated returns of 12.44%, compared with 4.95% for the Dow Jones–UBS index and 3.43% for the Goldman Sachs index. In a phone interview with AdvisorOne, Guyer, a commodities wonk who has analyzed the various indexes since 1994, said his index was unique because it was “attuned to replication costs associated with high-frequency index strategies” as well as the “rolling issues of contango.”