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Returns to Investing in Commodity Futures: Separating the Wheat from the Chaff

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  • Scott H. Irwin
  • Dwight R. Sanders
  • Aaron Smith
  • Scott Main

Abstract

Commodity futures investment grew rapidly after its popularity exploded in the mid‐2000s. However, real‐time performance has been disappointing. Our analysis shows that the disappointing commodity returns were not driven mechanically by contango or negative “roll yields.” We show that the expected return to individual commodity futures is near zero before expenses, which implies net losses (before interest earnings) will be equal to order execution and operating costs estimated at 3%–4% per year. Finally, it is likely that rapid increases in commodity prices during 2004–2008 skewed investor return expectations upward much like it did in the early 1970s.

Suggested Citation

  • Scott H. Irwin & Dwight R. Sanders & Aaron Smith & Scott Main, 2020. "Returns to Investing in Commodity Futures: Separating the Wheat from the Chaff," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 42(4), pages 583-610, December.
    • Handle: RePEc:wly:apecpp:v:42:y:2020:i:4:p:583-610
    DOI: 10.1002/aepp.13049
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    Cited by:

    1. Nicole M. Moran & Scott H. Irwin & Philip Garcia, 2020. "Who Wins and Who Loses? Trader Returns and Risk Premiums in Agricultural Futures Markets," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 42(4), pages 611-652, December.
    2. Isengildina Massa, Olga & Stewart, Shamar & Hassman, Colburn H., 2021. "RETURN DIVERGENCE IN COMMODITY ETFs: NATURE AND CAUSES," 2021 Annual Meeting, August 1-3, Austin, Texas 313896, Agricultural and Applied Economics Association.

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