Other Commodities?

[Gosso]

I was looking into adding other commodities besides gold into my VP (I have thought about adding them to the PP as well, which is why I posted this in the gold section).  Through my searching I discovered how difficult it is to find an ETF that actually tracks the price of its underlying commodity.  The reason being is these ETF's use futures contracts and don't hold the real commodity.  Apparently this creates a significant drag on the ETF, see below (OIL and USO are ETF's, WTI is the real oil price):


http://seekingalpha.com/article/198989- ... de-oil-etf

Here is a relevant section from this Bank of Canada Report, "Predatory or Sunshine Trading? Evidence from Crude Oil ETF Rolls":

[quote=Bank of Canada, page 33]First, USO and other crude oil ETFs were not designed to deliver
returns that track changes in the level of crude oil prices, either spot or future, but changes in prices of
individual futures contracts. A recent USO “Fact Sheet”? indicates that USO’s investment objective is to
deliver returns that reflect “changes in percentage terms of ….the futures contract on light, sweet crude
oil traded on the New York Mercantile Exchange that is the near month contract to expire, less USO’s
expenses.”? Second, investors who hold spot crude oil do not earn returns that match the change in spot
prices, as they incur costs of storing and insuring the crude oil. Indeed, crude oil ETFs take positions in
futures contracts rather than holding spot crude oil to avoid incurring such storage costs. In contrast,
ETFs designed to deliver returns that depend on the prices of commodities with lower storage costs (e.g.
precious metals) often hold physical inventories.25[/quote]

Also, page 55 of that report has another graph displaying the drag.

This is not a problem for precious metals, since GLD, GTU, etc, hold the physical metal.

Another article here, "Amber Waves of Pain".

I wonder how relevant portfolio backtesting with commodities is (other than with precious metals)?  I know I will stop using commodities in the Simba spreadsheet.

So, looks like I'll be staying with good old gold in the VP (and PP).  Although I may look into energy stocks for the VP, but I'd prefer the real thing.