The Free Lunch Is Shrinking

Last Updated: 17 January 2023

For starters, it seems to me that you overstate the concerns in your most-recent blog. It is absolutely true that investors have been getting killed in the commodity ETFs. Commodity indices were built in a market-naïve manner, paying no attention to trading issues. Funds like the United States Oil Fund (NYSEArca: USO) were originally designed to turn over their entire portfolios in a single day.

That worked fine while USO had US$10 million to manage, but as the fund swelled into the billions it became a huge problem.

The folks at United States Commodity Funds recognised this, however, and tweaked the methodology. Now, rather than rolling on a single day, they spread the roll over five days. The Futures Mag article you mention recognises this, but the profiled trader, Emil Van Essen, promises that he’ll stay one step ahead of “whatever changes” are made to the index methodology.

Personally, I think the amount of alpha available to index arbitrage will shrink in commodities, just as it has shrunk in equities, as index providers develop better methodologies and more players like Van Essen enter the market.

I remember during the late-1990s when stocks would jump 10%-20% when they were added in the S&P 500. Similarly, five years ago, the Russell rebalance regularly cost investors in the popular Russell 2000 small-cap index 1%-2% in returns.

But the S&P 500 game is now very crowded, and Russell has tweaked its methodology to help index funds spread their trades around the annual rebalance. Both of those markets have become more efficient, and much if not all of the index effect has disappeared.

I’d note that all of the studies you quoted cited data from near the turn of the millennium.

The problem with commodities is that the indexing boom was so quick. The indexers and the hedge fund community haven’t caught up with the huge boost in assets, which is why the gentleman profiled in the Futures Magazine piece has had such a nice run. But free lunches get eaten, and my guess is that this one is almost done. The indexers are catching on, and the market’s getting more crowded.

Articles like the one published in Futures Magazine almost always catch trends after they’ve peaked. Investors in large commodity funds tied to popular indices would do well to worry about the index effect. But my guess is that the worst days are over.


  • Hello, my name is Luke Handt; I am a successful Bitcoin trader, financial analyst, and researcher. I have been studying the market trends for the conventional stock exchange system globally since I was in college.

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