By Lewis Braham
As Wall Street has migrated from actively managed stock funds to passive index ones in recent years, commodity funds have quietly moved in the opposite direction -- toward active management. In both cases, these shifts have benefited investors. But while everyone knows the stock index story, few investors know why a new breed of active and quasi-active commodity funds are appealing.
The earliest commodity funds tracked popular benchmarks such as the Goldman Sachs Commodity Index -- developed in 1991 and now called the S&P GSCI -- and the Bloomberg Commodity Index, or BCOM, as it is often called. The S&P GSCI proved to be such a poor investment that a once-popular fund tracking it known as Oppenheimer Commodity Strategy Total Return liquidated in 2016 after losing money each year since 2010. The iShares S&P GSCI Commodity-Indexed Trust (ticker: GSG) now tracks the index but with lackluster results.
"It's hard to picture an asset class that's more biased toward benefiting from active management," says David Schassler, manager of the active VanEck Commodity Strategy exchange-traded fund $(PIT)$. Since his ETF's December 2022 inception, it has delivered a cumulative 16.2% return, besting the iShares S&P GSCI ETF's 11.2% and the BCOM-tracking abrdn Bloomberg All Commodity Strategy $(BCI)$ ETF's 2.6%. Schassler and other active commodity fund managers point to "structural flaws" in these popular benchmarks that make them easy to beat.
One basic flaw is that important commodities are left out of benchmarks, leading to inefficiencies. "Cocoa used to be in the BCOM index, and about a decade ago, [the index's designers] took it out because it was too small," says Kurt Nelson, co-founder of SummerHaven Index Management, which designs benchmarks for ETFs to track. "So, they missed this whole price rally recently in cocoa."
To gain commodity exposure, funds buy futures contracts -- derivatives that have expiration dates similar to bond maturities. The S&P GSCI and BCOM index funds typically own the most liquid contracts for each commodity expiring in one to two months, then purchase the next months' contracts when those expire -- what is known as contract roll. But imagine buying Treasuries if you could only buy one-month T-bills, and couldn't even consider buying one-year or 10-year Treasury bonds with better yields.
Worse, because commodity traders know when the big indexes roll their contracts each month, they can buy the contracts the index funds will be buying ahead of time, forcing index funds to pay more for them -- what is known as front-running.
Even without such gamesmanship, commodity contract expiration curves can be in "contango" -- where front month contracts cost less than later ones -- or "backwardation" -- where the front-month contracts are more expensive. Those lower-priced contracts in contango incur a cost when rolled into higher-priced ones, which hurts returns, while those in backwardation actually provide additional return for investors.
An astute active manager can try to find the best-priced futures contracts on a commodity's expiration curve and generate additional returns through the roll-yield of commodities in backwardation. Manager Greg Sharenow of ETF Pimco Commodity Strategy Active $(CMDT)$ employs this strategy. "Over time, historically, we realize about [3.5 to 4 percentage points] better carry [i.e., roll yield] in our ETF than the traditional BCOM index," he says.
That's before even considering how managers are weighting the commodities in their portfolios. The actively managed AQR Risk-Balanced Commodities Strategy fund (ARCNX) has dramatically outperformed the indexes by weighting commodities based on their volatility, so their risks have equal impacts on the fund's returns. That's dramatically different from the S&P GSCI, which weights commodities on their global production values. Consequently, energy commodities like oil have an almost 60% weighting in the S&P GSCI.
By applying a more thoughtful active approach, AQR has produced a 19.0% five-year annualized return, almost doubling the abrdn Bloomberg All Commodity Strategy's 10.0% and besting the iShares S&P GSCI ETF's 15.4%, despite a strong post-Covid market for oil.
"There's a variety of strategies to add value in our investment process, " says Jordan Brooks, the AQR fund's manager. "80% of the risk taking [in the portfolio] is what I call targeting a risk-balanced exposure across commodity sectors." But about 20% is over- or underweighting individual commodity sectors based on quantitative analysis and picking the right commodity futures contract maturity.
Simply being more diversified than the indexes and rebalancing the commodity weightings frequently so there's more of the cheap commodities and less of the pricey ones has proved to be a winning strategy for Parametric Commodity Strategy (EAPCX). "The main problem we find is that these indexes tend to be very concentrated," says Greg Liebl, the Parametric fund's manager.
All is not lost for indexers. The USCF SummerHaven Dynamic Commodity Strategy ETF $(SDCI)$ tracks an index that SummerHaven's Nelson helped design that is meant to address the flaws in earlier benchmarks. The SDCI benchmark equal weights the 14 commodities with futures contracts that have the most backwardation. That has paid off, and the fund has produced an exceptional 22.1% five-year return.
But the more an index designer tinkers with a benchmark's strategy to optimize it, the less it seems like a passive investment strategy and the more it seems like an active one.
Email: editors@barrons.com
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(END) Dow Jones Newswires
August 27, 2025 03:00 ET (07:00 GMT)
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