Trading commodity ETFs: Price behavior, investment insights, and performance analysis

Abstract

This study analyzes the risk‐adjusted performance of commodity exchange‐traded funds (ETFs) across diverse market conditions. Examining monthly returns from December 2004 to June 2022, our findings suggest that commodity ETFs underperformed US stocks, indicating limited diversification benefits. However, we document positive α during turbulent market periods like the COVID‐19 crisis, signifying potential resilience. Furthermore, our factor regressions reveal that shifts in the global commodity price index and disposable personal income significantly influence commodity ETFs' excess returns, pointing to broader economic and income‐related trends. Commodity ETFs exhibit lower Value‐at‐Risk and Expected Shortfall compared to stock market indices, indicating reduced downside risk exposure for investors. Given the increasing popularity of commodity ETFs, these insights hold substantial significance for market participants.