MFM iFunds ETF Commodity Fund sounds good

Thanks Wombat - definitely food for thought;) .

So what proportion of your Chinese gains have you ploughed in?

Liz_the_Whizz wrote: »

The fund has certainly turned in an eye-catching 15.9% growth over the last 3 months, easily top of the Citywire table of 87 Specialist funds.

But my concern is whether it is already too late to catch the wave - surely it can't sustain that sort of growth?

Over the long run a diversified commodity fund or ETF should have similar returns and volatitily to equities whilst being uncorrelated.

The ETFs did nothing for about 12 months and then all the gains came suddenly. That's the nature of investing. It's unrealistic to expect 16% every quarter but an allocation to commodities should serve any portfolio well for the long run.

These investments are backed by commodity futures. I do wonder if people getting involved with these know the nature of the returns. Rising spot prices aren't everything. These investments can make money even when spot prices are on average pretty static.

cloud_dog wrote: »

Jon, am intrigued, could you elaborate. I know there are a new breed ot short and leveraged ETF'd but I thought the ones you were mentioning were your average / normal ETFs???

Yes - I'm talking about normal ETFs such as AIGC and FAIG. Here are the components of the return:

1. Interest. Commoditity futures can be bought on a 10% margin. My understanding is that 10% of your investment is used for this purpose. The other 90% is invested in US treasury bills which earn interest. These funds are used as collateral in case of margin calls.

2. Rebalancing return. The individual commodities (e.g. oil, silver, coffee) aren't particularly correlated with each other. They pricing is also volatile. This means the index can generate a return by rebalancing each year - effectively buying low and selling high.

3. Roll Yield. This is the most technically involved part of the return and seems to work best with forward indexes such as FAIG.

I posted a good example on a previous thread. Basically the spot price in late Dec was $95.68 but the July 2008 contract was selling at $93.73. So by holding the contract to maturity you would make money (about 4.2% compounded) if the spot price remained static.

Roll yield can go negative as well though.

4. Rising Spot Prices. Yes - if the spot price goes up then your contract becomes more valuable.

Incidently - after further reading on the web I'm not sure that the leveraged ETFs are any good for long-term buy-and-hold investors. They're more for traders. The issue is of one of negative compounding when the daily result goes against you. You suffer the double the normal loss. Then the fund sells its losers (locking in the loss) to rebalance to 50/50 contracts/leverage.