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

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.