Investment in Commodities ETFs and Management of Contango

Andrew Papanicolaou
University of Sydney

The last decade has seen more and more investment in commodities markets, both through futures and a growing number of ETFs. These ETFs should not be passive investments, as they will post substantial losses when there is contango in the futures curve. The focus of this talk will be storable goods, where uncertainty in the convenience yield reduces the Sharpe ratio for portfolios trading in ETFs. Such losses are seen as an
information premium, and are quantified through a Merton-type control problem for maximizing an investor's utility.

Back to Workshop III: Commodity Markets and their Financialization