The constituents of the DJUBS Commodities Index 15.96% WTI crude oil 9.84% Wheat 8.94% Corn 7.14% Live cattle 6.49% Soybeans 6.27% Brent crude oil 6.13% Gold 5.03% Aluminium 4.86% Copper 3.98% Lean hogs 3.50% Sugar 3.35% Natural gas 2.44% Gas oil 2.30% Heating oil 2.05% Kansas wheat 2.03% RBOB gasoline 2.01% Cotton 1.76% Coffee 1.31% Feeder cattle 1.26% Nickel 1.18% Zinc 0.81% Cocoa 0.74% Lead 0.61% Silver

Most investors choose to gain exposure to commodities through purchasing ETF’s. Most marketing material from product providers illustrate the performance of their ETF by comparison to the underlying Commodity index not the commodity future itself.

The following slides compare the performance of ETF’s relative to the continuation chart or the spot price of the underlying Note the performance of the spot price or near term contract in white relative to the performance of the ETF in green

Oil WTI

Wheat

Corn

Live Cattle

Soybean

Brent Oil

Gold

Aluminium

Copper

Lean Hogs

Sugar

Natural Gas

Gas Oil (Heating Oil Europe)

Heating Oil (US)

Kansas Wheat

RBOB Gasoline

Cotton

Coffee

Feeder Cattle – no ETF

Nickel

Zinc

Cocoa (ETF Leveraged)

Lead (ETF Leveraged)

Silver

A remarkable number of ETF’s have underperformed the underlying commodity it purports to track The marketing literature of most ETFs explain that the ETF will track the underlying commodity less Seasonal factors Supply/ demand on the underlying commodity Trading commissions Fund manager charges

What is the effect of supply and demand As an investor in an ETF there is little that can be done with regards to trading commissions and managers fees. However supply and demand and seasonal factors have an important impact on the price of commodities, both for the near-term contracts and contracts with a later date. The commodity curve (the future price) is said to be in Contango if the cost of a commodity in higher in the future than the price for near delivery If the future price is less than the present price then the commodity is said to be in backwardation. Backwardation can mean that demand is greater than near term supply.

The effect of Backwardation Sugar in Backwardation Feb 06 ETF performs well 06 to 07

The effect of Contango Sugar in Contango Feb 2008ETF underperforms 08 to 09

Conclusion Commodity Index ETF performance receives a considerable tailwind from a futures curve in backwardation. Therefore assessing the shape of the futures curve is virtually essential to the decision making process in buying commodity index funds If the futures curve is in contango, consider a short ETF If commodities move into another speculation driven advance, last seen in 2008, we can expect the futures curve for a large number of commodities to move into backwardation. Important to have an exit strategy prepared for the next such broad based momentum run. Caution: There is the potential for legislation against such funds during the next big upside move in commodities where speculators will be accused of driving commodity prices higher.