A Reappraisal of Investing in Commodity Futures Markets

Investments into commodity-linked products have grown considerably in recent years. Unlike investments in equities, commodity futures markets produce no earnings; the source of returns is thus unclear. This paper examines returns to static long-only U.S. commodity futures investments over five decades and finds that returns to individual futures markets are zero, and the returns to futures market portfolios depend critically on portfolio weighting schemes. Historical portfolio returns are not statistically different from zero and are driven by price episodes such as that of 1972-1974. In other periods, portfolio returns are zero or negative. Overall, the case for long-only investment in commodities may not be as strong as that implied in some studies (e.g., Gorton and Rouwenhorst, 2006a). If so, the growth in long-only commodity investments may naturally subside and ease the policy debate regarding speculative position limits.