Will Putting Position Limits On Commodity ETFs Limit Their Usefulness?

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September 26, 2009 8:31pm ETF BASIC NEWS

limitations“With all the talk of ETF closures and increased regulation, it’s clear we live in the middle of a proverbial Chinese punch line: interesting times. Last week, guest Rick Ferri urged investors to approach commodities


 with great caution. This week, we caught up with Larry Swedroe to get a competing opinion,”  Lara Crigger From HAI Writes.

“Mr. Swedroe is principal and director of Research at BAM Advisor Services, and a principal and director of Research for the Buckingham Family of Financial Services. He’s also a prolific author, and one of the most respected financial advisers in the business today. His latest book, The Only Guide To Alternative Investments You’ll Ever Need, was published by Bloomberg last November,” Crigger Writes.

“This past week, HAI Associate Editor Lara Crigger chatted with Mr. Swedroe about the role commodities can play in an investor’s portfolio, including how they correlate to stocks and bonds, why they act as “flood insurance” and whether investors should select commodity stocks or futures,” Crigger Writes.

Here’s two questions Lara Crigger asks Mr. Swedroe related to ETF’s below:

Crigger: What about the fact that we’ve seen commodity stock ETFs outperform futures ETFs in the past year or so?

Swedroe: I don’t look at any one year; you want to look at the long-term evidence. And the long-term evidence is simple. You buy commodity futures for one reason: to protect against supply shocks and event risks that can negatively influence your portfolio in both stocks and bonds. You have to decide which one is the better insurer, and it’s the one with the lower correlation.

Crigger: We’ve seen a lot of discussion about adding position limits to commodity ETFs. Should this occur, will putting position limits on commodity ETFs limit their usefulness as insurance for investors?

Swedroe: Any effort to do that in my opinion is purely politically driven. It actually may even make things worse, so that we have more volatility. What it would do is limit the ability for people to access them, creating an excess demand. That would drive up the value of the contracts people have already bought, and people end up having to pay more for the insurance.

Click Here For A Look At The Full Interview

 

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