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View Full Version : ETFs.. The Contango Trap- Making a Living off Dumb Money.



SilverFinger
08-25-2010, 09:03 AM
Contango is a word traders use to describe a specific market condition, when contracts for future delivery of a commodity are more expensive than near-term contracts for the same stuff. It is common in commodity markets, though as Wolf and other investors learned, it can spell doom for commodity ETFs.

When the futures contracts that commodity funds own are about to expire, fund managers have to sell them and buy new ones; otherwise, they would have to take delivery of billions of dollars' worth of raw materials. When they buy the more expensive contracts -- more expensive because of contango -- they lose money for their investors. Contango eats a fund's seed corn, chewing away its value.

Contango isn't the only reason commodity ETFs make lousy buy-and-hold investments. Professional futures traders exploit the ETFs' monthly rolls to make easy profits at the little guy's expense. Unlike ETF managers, the professionals don't trade at set times. They can buy the next month ahead of the big programmed rolls to drive up the price, or sell and push down the price investors get paid for expiring futures. The strategy is called pre-rolling.

"I make a living off the dumb money," says Emil van Essen, the founder of an eponymous commodity trading company in Chicago. Van Essen developed software that predicts and profits from pre-rolling. "These index funds get eaten alive by people like me," he says.

A look at 10 well-known funds based on commodity futures found that, since inception, all 10 have trailed the performance of their underlying raw materials.

Got Goldies
08-25-2010, 10:09 AM
Commodities did not hold up well in price during the Great Depression. It sounds like he don't know what is coming. The home owner is over reached for Cash and now can't spend anything more.

nuts4gold
08-26-2010, 05:54 AM
Commodities did not hold up well in price during the Great Depression. It sounds like he don't know what is coming. The home owner is over reached for Cash and now can't spend anything more.

Sure he is another suit submersed in the game...