ZIRP-finity

[chicago81]

You seem to object to the index style buying of futures contracts. I assume that your objection is based in asset volatility, that the potential for buying automatically exposes me to a huge potential for loss of asset value. If the price were $45, I would agree with you. But at 27.80, this seems too good to be true.

No my comment wasn't related to commodities in general, nor related to volatility. I was trying to bring to mind the slippage that these kinds of funds incur on a regular basis when they need to constantly roll the front month contracts out into the future with longer dated contracts. My opinion is that funds managed in this manner may not really be suitable for someone who wants long term exposure to the underlying commodity. Sorry if I caused confusion, I should have been more descriptive in my prior post.

[Dragline]

Yes, its the rolling over of contracts that usually causes these types of funds to underperform long-term.

My experience with these things is that I'm usually better off finding a REIT that is investing in the same thing. Two of the ones I bought in the last year PCL (timber), and SE (natural gas) ended up being bought by larger players, which was very nice.

[IlliniDave]

What is more risky ... drawdowns or riskier investments? Is there a level at which the risk of an investment outweighs the risk of a drawdown?

Hard to answer because it is a little like apples and oranges. Risky investments tends to imply volatility which is a relatively short-term thing. Drawdown, along with so-called "deep risk" (basically inflation) are longer-term things.

Temperament is a big contributor to which one might be worst for you--you'd have to decide what causes you to lose more sleep at night. Since you are "on the sidelines" I'd suggest that volatility causes you the most angst (to me, going "all-out" is a pretty extreme move).

The time horizon I invest to extends beyond my expected lifetime (legacy), so excessive drawdown is a bigger worry than volatility and I'm willing to be flexible with "income" and tolerate ups/downs in the shorter run. Someone to whom it is more important to have steady, predictable spending would likely rate volatility as the greater evil.

Thing is, the rewards of investing come as compensation for shouldering risk, and we're stuck with a pick your poison choice if we want to use our money to earn more.

[Riggerjack]

I was trying to bring to mind the slippage that these kinds of funds incur on a regular basis when they need to constantly roll the front month contracts out into the future with longer dated contracts. My opinion is that funds managed in this manner may not really be suitable for someone who wants long term exposure to the underlying commodity.

Now I'm a bit confused. This slippage you speak of sounds much like the reason that index funds trail indexes. A small inefficiency, but significant in long terms. I am not interested in JJG as a long term prospect. I'm only interested because of the price, when that changes, so will my interest.

For example, I am a landlord with 2 rental houses, I may buy more, but not now. Because prices are too high. Rents are also high, but when the next recession hits, rents will fall, but mortgage payments stay the same. So, given current prices, I am looking at other investments.

I want the volatility. That is why I am looking at a low priced commodity, rather than the REIT of the farmland that produces the commodity. Low corn price will drop the return for corn farmers, a bit. So the REIT will drop a bit, maybe. This pretty much negates the opportunity.. As much as I dislike gold as an investment, if it was 400/oz, right now, I would buy gold, not a gold mining stock, or fund.

If there is a better way to do this, I am all ears.

[jacob]

IIRC, you can now buy the calendar spreads directly, so the slippage cost of a roll is priced directly and the spread is just two ticks (active out + active in) and the transaction is instant(*). Two ticks is almost nothing compared to the fund fees. The slippage here should be trivial.

(*) Either some arb-trader is taking care of it or it's directly part of CME's matching engine. In any case, it's happening at a fundamental level.

Note, holding the calendar spread itself instead of using it to roll the fungible contracts would be less risky to other factors since the main thesis is just that corn/soy/wheat (that's the three things you can trade) going up over time. This would have zero fees but is probably more manual labor than you're interested in. (Would have to establish a futures account with a certain size (each mini-contract is 27 metric tons, and these deliver physically ).

[Riggerjack]

Yeah, avoiding the legendary commodities delivery debacle has some value. More to the point, it is not available in my 401k. That is my passive investment fund, allowing me to do most of what I want, without tax concerns.
Real estate is still my main investment, and where I put my money outside of the 25% 401k contributions limit.

As I said, I'm not a commodities trader. I believe I would have to qualify as a sophisticated investor. I may qualify on net worth, but certainly not on sophistication.

Here is my take. JJG us tied to grains futures pricing. If I bought at $30, and hold for 3 years, my value will be the value in 2019, minus 0.75% times three, and "slippage".

I have no way of measuring this slippage, and information is pretty sketchy on the index, overall.

This is what is meant by Fed encouraged risk, I imagine. Though I seem to be off the charts in my comfort levels of risk tolerance...

[chicago81]

I think JJG holds mostly soybeans, corn and wheat.

Delayed futures quotes are available at:
http://www.cmegroup.com/trading/agricul ... ybean.html
http://www.cmegroup.com/trading/agricul ... /corn.html
http://www.cmegroup.com/trading/agricul ... wheat.html

You can see there is a difference in the price quote between the front month and the month that expires slightly further out which might give you a ballpark as to how much can be lost in a calendar roll. I do think the spreads between the two front month contracts will compressed a little bit more as it gets closer to the front month expiring, but there still will be a spread.

[jacob]

@chicago81 - I think a live feed is required to make the determination. IIRC, only the front month is seriously traded. This should hold except for expiration Friday when the spread should narrow. Dunno if it's obvious, but the way I read you post was to compare PRC_last(front)-PRC_last(calendar). That's the market's estimate of how much the price will rise or fall between the front month and the calendar month. The spread I'm talking about is PRC_Ask(front)-PRC_Bid(calendar) compared to PRC_Bid(front)-PRC_Ask(calendar). That'd be the pure/matching engine arb.