We undertook a simple exercise with the DJUBS total return commodity index. We compared the total return for the 3-month forward versus the 1-month forward. This difference will capture the impact of the forward curve on the commodity index. The chart shows the total return difference since 2000 and the ratio of the two total return series.
If the markets are in backwardation, then the F1 index will be greater than the F3 index. If the ratio declines then the F1 is doing better than the F3 and suggests that an investor would be better served to hold the nearby futures basket. During the period when commodities had their greatest increases, the markets were generally in backwardation and showed better F1 performance. This changed after the 2006 when the F3 index did better. Over the last 2-3 years performance differences have been flat and more recently, the front-month F1 contract actually showed better performance. The forward curves for the index are dynamic and it is not always the case that an investor should be either in the front or the back of the forward curve.
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