Why You Should Generally Avoid Commodity ETFs Despite Inflation, Commodity Prices Rising

There are good ways to get involved in inflation plays, and there are bad ways. [The Rude Awakening] July 04, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Why You Should Generally Avoid Commodity ETFs Despite Inflation, Commodity Prices Rising - Buying commodities during an inflationary period is smart. - How you buy those commodities really matters. - Why do contango, backwardation, and roll yield matter so much? - What you can do to participate in the coming inflationary period. [New Biden Bucks Follow-Up Available Now]( Hey, it’s Jim Rickards. Since posting my original Biden Bucks presentation online, millions of people have viewed it. Snopes and the Associated Press have even attempted to “fact check” me and claim my warnings are false: [Click here to learn more]( Point being, my message has raised a storm and caused a lot of controversy. But in the time between my message and now, a lot of new developments have come to light. That’s why I’ve just released an update to my original prediction… one which will likely be even more controversial. [>> Click here now to access my new 2023 Biden Bucks follow-up](. [Click Here To Learn More]( [Sean Ring] SEAN RING Happy July 4th! I wrote this way back in May 2021, but I still think it applies. I hope you enjoy it, and your day off! Inflation, Up. Commodities, Up. Let’s do Commodity ETFs! It makes total sense. You think, “Inflation is happening. Lumber, copper, and coffee prices are going through the roof. But I don’t know if I’ve missed these rallies, or which ones will go up next, so I probably should buy a commodity ETF.” The thinking is sound. But for reasons I’ll demonstrate in today’s Rude, most commodity ETFs should be avoided like the plague. What are ETFs? Very briefly, to make sure we’re on the same page, I’ll define ETFs. ETFs are exchange-traded funds, which have all the characteristics of a mutual fund, except they trade on a stock exchange like any other security. A good reason to invest using ETFs is that they’re cheap to own. They only charge around 0.20% per year, because ETFs aren’t actively managed. And they certainly don’t charge an assets-under-management (AUM) fee or a performance fee like hedge funds do. ETFs are a great addition to most investor portfolios, as you can cheaply buy “the market.” That is, you can buy ETFs on the following things: - Bonds - Bitcoin - Commodities - Equities - Money Markets - Multi-Asset - Precious Metals - Real Estate The list is almost endless. As of the end of 2020, there were 7,602 ETFs managing over $7 trillion of assets. For assets such as equities and bonds, they’re just fine. For example, the SPDR S&P 500 ETF (SPY) tracks the index and is the largest ETF with nearly $330 billion in assets. The QQQ tracks the Nasdaq; the TLT covers U.S. Treasuries; the HYG covers high yield or junk bonds. Of course, you can also buy sectors of the market, such as tech, healthcare, and pharmaceuticals, to name a few. There are also commodity ETFs, which, for reasons I’ll get into presently, are mostly crap. One Drunken Night in a Club At my last banking job, I was at an offsite in Taipei. One evening, over a bottle of champagne at a dance club, I was talking to a managing director about how I thought oil was going to explode higher. I didn’t want to buy futures - as a former futures broker I knew how risky that could be - so I was thinking of buying the USO (United States Oil Fund) instead. With a look of solemn despair and warning, he said, “Never do that. You must understand how most of these commodity funds are structured. You know what happens when markets are in contango. The roll yield will kill you.” I’m going to parse out that warning for you. It’s amazing how some side conversation on the ass-end of the world can save your portfolio. How are Commodity Funds Structured? If you’re intent on investing in commodity funds, this is the first place you must do a bit of homework. The question you must answer is this: “Does this fund use the actual underlying asset to create the fund, or does it replicate ownership using futures contracts?” If it’s using the actual asset, fine. You can proceed. (For example, GLD, the SPDR® Gold Shares, is the largest physically-backed gold ETF in the world.) But if it’s using futures contracts, it’s a no-go. Let me tell you why. Let’s very quickly define futures contracts. Futures are a standardized obligation to buy or sell a specified quantity of a standardized asset at a price agreed today for delivery in the future. For example, the WTI oil futures contract is an obligation to buy or sell 1,000 barrels of West Texas Intermediate oil at the price you agreed today (say, $64.90) for settlement in the month you bought or sold (say, May 2021). The issue with futures contracts is that you need to roll them. They just don’t last that long. That is, they mature every month. For instance, before the May 2021 contract matures May 31, 2021, you need to “roll” into the June 2021 contract. Then before June 30, 2021, you need to roll into the July contract. This can get very expensive, not because of the commissions - which are minuscule nowadays - but because of the difference between what you can sell the May contract for and buy the June contract for. That leads us to two more important terms. [Rickards: “Look at this $1 bill…”]( [Click here to learn more]( There’s a very important reason Jim Rickards is holding this $1 bill… It has to do with [a critical 11-word message]( hiding in plain sight, right on the front. Without this message… Every dollar you own would be completely WORTHLESS. And as Jim points out… That could be EXACTLY what Joe Biden has in mind. [Click here to learn the TRUTH, and how to protect your money now](. [Click Here To Learn More]( Contango Isn’t a Dance; Backwardation isn’t Reversing Your Car As Socrates stated almost 2,500 years ago, “The beginning of wisdom is the definition of terms.” And boy, does the financial world throw up some doozies! So let’s get these two esoteric terms defined. Contango simply means the futures price of an asset is greater than the spot or cash price of the asset. Although a futures price is not a prediction, contango usually occurs when price rises are expected over time. [SJN] Backwardation is the opposite of contango. That’s when the spot price of an asset is greater than the futures price. [SJN] I have no idea how they came up with these terms. Never mind, because the important part is the roll yield. “Yield,” in finance, is synonymous with “return.” (We usually use “yield” in fixed income and commodities, and “return” with equities, but there are exceptions.) The roll yield is the amount of return generated after an investor rolls a short-term contract into a longer-term contract. The managers of commodity funds have to do this every month to attempt to mimic the underlying asset. Unfortunately, it doesn’t work out like that. The roll yield is the reason. Most futures markets are in contango. As futures prices aren’t a prediction, the reason why they’re higher is because of the costs associated with storage, insurance, and foregone interest. All are a function of time. So the longer out you go, the more expensive the contract is. Since most futures are in contango, the commodity ETFs based on them lose big money on the roll yield, despite the spot and futures prices going up! That’s because they’ve got to roll every month, and the farther out contracts are more expensive. To get a feel on just how often a roll yield is negative, look at this, [from WisdomTree]( [SJN] The roll yield is almost always negative! The exception is the backwardated market. That happens during supply squeezes, a heavy increase in demand, or times of war. It’s when buyers want that asset right now, and will pay more for it. Think China buying wheat during a drought, or buying copper when they want to wire up an entire ghost city. Or America invading the Middle East, driving up oil prices. But this doesn’t happen all that often. And if it does, it’s difficult for an investor to notice it. Interestingly, the WTI is in backwardation at the moment. And USO has rallied considerably since the disastrous Saudi-Russian oil standoff in 2020. But to assume that will continue indefinitely is foolhardy. The curve can flip from backwardated to contango at any moment. [pub] So the real worry is not what the underlying price of oil does. It’s whether or not the futures curve stays in backwardation. I think there are far better ways to spend your time. Alternatives to Futures-Based Commodity ETFs Trading the Futures Themselves First, you can trade the futures themselves, but they come with all sorts of risks. Not my first choice unless you have millions of dollars in the bank already. And you’ve got the kind of mentality that can handle daily losses. Buying Commodity Company ETFs But you can invest in the ETFs of companies whose main business is commodities. If you like gold, you can look at GDX or GDXJ. If you like oil and gas, you can look at XOP or IEO. Please keep in mind that I’m not recommending these ETFs. I’m only giving you an idea of what you can do, given your view. Buying the Commodity Companies Themselves - The Pure Play If you prefer single stocks and think you have an edge, you can always buy the company stocks themselves. ETFs provide diversification while also giving you exposure to a sector. But if you think a single stock will do the job for you and are willing to take the risk, this is your play. For oil, this may be Exxon (XOM) or Chevron (CVX). For gold, this may be Barrick Gold (GOLD) or Franco Nevada (FNV). Again, you must do your research when undertaking these kinds of investments. Just remember, the first thing you must do is preserve your capital. Well, that’s all I’ve got for now. I wish you an absolutely rocking week ahead! Until tomorrow. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( In Case You Missed It… Redo: Keep Your Employees’ Noses to the Grindstone [Sean Ring] SEAN RING Good morning from Sicily! This is one of my pieces from January. I hope you enjoy it and your day off! --------------------------------------------------------------- If you’re unaware, I now write for the Daily Reckoning’s new Morning Reckoning newsletter on Thursdays. My latest piece gives you steps to build your [Free State of Me](. One of the pieces of advice is to start an online business. But many don’t know how to do that. With that in mind, and since we don’t have any economic figures to report and the market is getting ready for the Fed meeting, I thought I’d briefly shift focus from macroeconomics to microeconomics. Microeconomics deals with the behavior of individuals and firms in making decisions about allocating scarce resources and the interactions among these individuals and firms. It’s critical to understand many microeconomic concepts to run a successful business, but perhaps none more so than how to keep your employees or freelancers motivated. Daniel Pink authored a book called Drive, published in 2009. It’s not about cars but what drives us to do the things we do. There’s an [excellent YouTube video]( that summarizes his findings. I encourage you to watch it after you read this. In this Rude, I’ll relay to you his excellent points. Just Pay People More! This works. Just not universally. Only in the right jobs with the right people. This is the most shocking finding among economists. For decades, the mantra was, “If you want higher performance, pay people more.” And this works for people doing mechanical jobs. That is, digging ditches or smashing rocks. But once a job requires even basic cognitive skills, this incentive no longer works. (As a former banker, I found this hard to believe. But bankers are a weird lot. Study after study replicates this finding.) Once the work task goes above rudimentary cognitive skills and into something like creativity, the motivation game changes. Innovative employees need something else: things that don’t involve money. Of course, you still have to pay people. But with intelligent employees, Pink says the trick is to pay them enough “to take money off the table.” That is, pay them enough that they don’t have to worry about cash. Once you’ve paid them well enough not to worry about their bills, what else do these employees need? [Download My New Survival Guide Today!]( I’ve created a BRAND-NEW “2023 Crisis Survival Guide” that I’m making available to all of my Strategic Intelligence readers today. This short 54-page document has everything you need to know to protect yourself and your family in times of crisis. Things like what foods to stock up on now, staying safe during periods of rioting and looting and more. Inside I break down all of the coming threats you face and how to prepare. [>> To see how to download your copy, click here now](. [Click Here To Learn More]( The Three Things Smart Employees Need What gets and keeps good employees motivated are autonomy, mastery, and purpose. I’ll explain each in turn. Autonomy According to Pink, autonomy is the ability to direct one’s work. Autonomy allows employees to feel empowered in their positions rather than like their success is out of their hands. Autonomous employees manage their time and decide how to do their work rather than having someone else dictate it for them. This sense of control gives them the freedom to be productive and engage in their job tasks. Anecdotally, one of the things I love most about my job here at the Rude is that my publisher, Matt Insley, never tells me what to write about day-to-day. (Though he does give great advice, particularly about my headlines!) Mastery The second element of employee motivation Pink discusses is mastery. Mastery is the desire to get better at what you do. When employees are allowed to improve themselves and hone their skills, it creates a sense of satisfaction that leads to increased motivation and productivity. Why do people play musical instruments on the weekends for free? Because they want to master something (and enjoy their melodious tunes, too, I’m sure). When we focus on mastering a skill or task instead of just completing it, it often leads us to new levels of engagement and creativity that are essential for any organization’s success. Purpose Finally, Pink proposes that purpose is a crucial factor when it comes to motivating employees as well. When one feels connected with the purpose behind their job tasks and understands how their work contributes towards something larger than themselves, it gives them a sense of meaning. That can help drive them forward even when things seem challenging or boring. It helps them stay focused on long-term goals (rather than getting caught up in short-term frustrations) and keeps them motivated throughout the journey toward achieving those goals. Of course, purpose gets confused with wokeness sometimes. I’ve heard horror stories about developers getting hired at tech firms and immediately concerning themselves with hiring policies rather than writing code. That’s no good. Businesses must profit to stay in business. But first, they must create revenue. Then they must collect that revenue and convert it into cash. If you don’t have profits, you won’t have a business. But if you don’t have cash, you don’t have a business. So, the purpose and the business must intertwine to work well. Wrap Up Motivating smart employees requires more than just cash. Strange as it may sound, they need autonomy, mastery, and purpose to flourish. And this isn’t some kumbaya stuff. It’s core to the success of a business and has been proven repeatedly. Motivation is an inherent part of any organization’s internal success strategy. To maximize your company’s potential, you’ll need motivated employees. Until tomorrow. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. 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