Among the modifications: The index rolls futures contracts seasonally when futures curves are downward sloping; the index rolls futures contracts that are five and six months out on the curve versus one and two months out; and the index rolls short-term contracts before the major indexes. These tweaks have added 4% annually to the index's performance versus the GSCI. While the GSCI is down 4.25% since July 2007, when the enhanced index was created, the ETN is up 0.12%.
Some market players also expect commodity prices to reassert their independence from the equity markets in the coming months. Investment banking firm Barclays expects to see correlations between equities and commodity futures head down again as the risk-on/risk-off investing following the financial crisis dissipates and fundamentals again predominate in the markets. Ted Wright, director of portfolio management at Genworth Financial Asset Management in Encino, Calif., agrees. "I can tell you if oil goes higher and detracts from GDP, you will get a separation in correlation between the equity markets and oil," he says. The firm prefers to use managed futures to take advantage of the "trendiness" in commodity markets. "Our expectation is that managed futures will provide good diversification benefits," says Wright.
Many advisors believe commodities futures deserve a place in portfolios as a hedge against event risk such as geopolitical instability and weather-related disruptions. "You don't really know when these events are going to happen, but by having a little bit of commodities exposure, you'll get some protection," says Busken.
RS Investments' Settles agrees that the futures markets are more effective at hedging against short-term shocks in supply. But ultimately, the question of how effective asset classes are in protecting investors from inflation gets back to returns, he says. Given the headwinds commodity futures investors face as a result of negative roll yields, "we believe natural resources equities are more effective in protecting investors against long-term increases in commodities price inflation," he says.