Commodities - Untouchable by Retail Investors

Last year in when Oil was trading over $150 per barrel I had a novel idea. Short Oil. More recently I had another "ah ha" moment. This time I was loving the lowest prices for natural gas since 2002 due to extremely slow demand and over supply.

I started researching how to invest in natural gas. The first thing I came up with was an ETF called the United States Natural Gas Fund (UNG). This seemed perfect for my investment thesis, so I jumped in.

Then I started researching (wrong order... I know)...

It turns out that the massive popularity of commodity ETFs has been their downfall. I turn to Neil Collins and his article Here’s why commodity trackers lose you money:

Standard & Poors reckons that $100 billion is invested in commodity tracker funds, and it is only now that the problems are becoming clear. Unlike shares, commodities need space and insurance for storage, so the funds buy the commodities forward, selling them before having to take physical delivery and buying forward again. Because they have strict rules about how and when they roll the contracts, the traders can see the forced sellers (and buyers) coming a mile off, and move their prices accordingly.

This is, effectively, a tax on the fund, and the bigger the fund gets in any one market, the greater the tax the traders can demand to roll its contracts. The result is to guarantee underperformance against the relevant index, and the longer the investment is held, the greater the underperformance will be.

So... basically since I have been invested in UNG I have been providing the infamous "free lunch" to commodity traders. Oops! This is just one of many examples of how Wall Street's finest set up products for retail investors that are designed to make THEM money. What more should we expect?

Caveat Emptor!