The Long/Flat Approach to Commodity Investing
Morningstar Long/Flat Commodity Index
DAN LEFKOVITZ: The Morningstar® Long/Flat Commodity IndexSM provides dynamic exposure between twenty different commodities and cash. Just like a professional commodities trader would, we use momentum as a signal. When a particular futures market for a commodity is exhibiting positive momentum, we maintain long exposure to that commodity. When the trend reverses, we move into cash. The goal of the index is really to maximize both sources of excess return, the commodities futures market price return and roll yield.
LEFKOVITZ: A traditional long-only approach works well for traditional asset classes, but commodities are different. If you look at the commodities futures market, the net supply is really zero. For every long position, there's also a short, because you have producers and consumers hedging their positions. You have commodities traders who are taking both long and short positions. And this is why you see a lot of disparity across indexes that provide exposure to the commodities market. You see a lot of commodities investment strategies that don't really offer exposure to commodities prices because of phenomena like contango and backwardation. So we've created an index that uses momentum, like a commodities trader would, vis-à-vis a long-only commodities index. So this may potentially provide better diversification and mitigate investors' exposure to negative roll yield.
Why a 12-Month Momentum Signal?
LEFKOVITZ: Commodities markets exhibit a significant degree of momentum. It takes time for supply-demand imbalances to work themselves out with commodities. So through our empirical research, we concluded that a twelve-month time frame provided the most complete picture of a momentum indicator. It's simple and intuitive. In agriculture, for example: twelve months includes all four seasons -- it's the entire cycle of production.
Commodities Sector Exposure
LEFKOVITZ: Our long/flat commodity index provides exposure to twenty individual commodities across four major commodities sectors: energy, metals, agriculture, and livestock. And the individual constituents will vary based on the size of their individual future contract value. But in the index, at any one point in time, we're likely to see crude and natural gas, gold and silver, corn and wheat, cattle and hogs. Unlike some indexes on the market, we cap exposure to individual commodities within the index.
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Diversification does not assure a profit nor protect against loss.
An investment in the Fund may be subject to risks which include, among others, fluctuations in the value of commodities markets based on economic events and policies, changes in interest rates or inflation rates, changes in monetary and exchange control programs, war, acts of terrorism, natural disasters and technological developments all of which may negatively impact the Fund. The Fund’s subsidiary is not registered under the 1940 Act and is not subject to all the investor protections of the 1940 Act. Thus, the Fund, as an investor in the subsidiary, will not have all the protections offered to investors in registered investment companies. The use of derivatives presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities.
The Morningstar® Long/Flat CommoditySM Index was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the Market Vectors Long/Flat Commodity ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Long/Flat CommoditySM Index is a service mark of Morningstar, Inc.
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