Washington, D . C . — The Commodity Futures Trading Commission today
issued a Customer Advisory informing the public about the unique risks
associated with certain trading vehicles that use futures contracts or
other commodity interests as they make investment decisions during the
COVID-19 (coronavirus) pandemic . This is the third Customer Advisory
the CFTC has issued in response to the pandemic and is a joint product
of the Office of Customer Education and Outreach (OCEO) and the
Division of Swap Dealer and Intermediary Oversight (DSIO) .
CFTC has observed that recent market volatility due to the pandemic
has prompted many investors to purchase shares of trading vehicles
that use futures contracts or other commodity interests, either in
hopes of profiting from a recovery in particular commodity prices or
as a means of diversifying their portfolios . These trading vehicles
may be organized as exchange-traded products (ETPs) or mutual funds,
but that does not necessarily mean they will behave like traditional
exchange-traded funds (ETFs) or mutual funds that invest in stocks,
bonds or other asset classes . For example, these vehicles might not
provide investors opportunities to “buy the dip” or profit from long-
term price gains in the underlying commodity .
“Now more than
ever, it is important for Main Street investors to understand how our
futures markets work when they go to evaluate their investment
choices,” said DSIO Director Joshua Sterling . “This advisory
highlights important characteristics of retail commodity pools, in
service of the CFTC’s core value of providing clarity to market
participants . ”
“The CFTC is committed to providing pertinent
information to help customers make sound investment decisions,” added
CFTC Chief Communications Officer and Director of Public Affairs
Michael Short .
About the Office of Customer Education and
OCEO is dedicated to helping customers protect
themselves from fraud or violations of the Commodity Exchange Act
through the research and development of effective financial education
materials and initiatives . OCEO engages in outreach and education to
retail investors, traders, industry organizations, and the
agricultural community . The office also frequently partners with
federal and state regulators as well as consumer protection groups .
The CFTC’s full repository of customer education materials can be
found at: cftc . gov/LearnAndProtect .
The Customer Advisory is
available in full below and on the CFTC’s coronavirus webpage: cftc .
* * * * * * *
volatility due to the COVID-19 (coronavirus) pandemic has prompted
many investors to purchase shares of trading vehicles that use futures
contracts or other commodity interests, either in hopes of profiting
from a recovery in particular commodity prices or as a means of
diversifying their portfolios . These trading vehicles may be
organized as exchange-traded products (ETPs) or mutual funds, but that
does not necessarily mean they will behave like traditional exchange-
traded funds (ETFs) or mutual funds that invest in stocks, bonds or
other asset classes . For example, these vehicles might not provide
investors opportunities to “buy the dip” or profit from long-term
price gains in the underlying commodity .
What to Ask When
Considering a Commodity ETP
Assess carefully any
representations that, by trading commodity interests, a pool should
outperform stock and bond funds during recessions or in other
financial downturns . A pool’s actual performance may indicate
otherwise . As you review the prospectus or disclosure document for a
commodity ETP fund consider: What financial instruments will the
commodity pool be allowed to trade? How do those instruments behave
when markets go up or down?
What could happen to those
financial instruments in extreme market conditions?
changes to the announced trading strategy is the commodity pool
operator (CPO) permitted to make, and under what circumstances? Can
changes be made without notifying participants?
Different Than Securities
Commodity ETPs and mutual funds
invest in futures, options, swaps, or foreign exchange and often are
commodity pools, whose operators are regulated by the CFTC . Commodity
futures markets present different risks than securities markets . For
example, when individual investors or mutual funds buy shares in a
company, they own a portion of that company . Those shares are assets,
and can be owned indefinitely .
Commodity pools (including
commodity-based ETPs), on the other hand, purchase time-limited
contracts that convey the right to buy or sell an asset—called the
“underlying asset”—at some point in the future . The contracts do not
convey ownership in the asset itself . The value of the shares in the
commodity pool may not track the value of the underlying asset over
This difference is because unlike with stocks, a futures
contract cannot be held indefinitely in hopes that a fallen price will
recover . Futures contracts expire, and contract holders must either
deliver or take delivery of the underlying asset, or close out their
contracts by taking an offsetting position before the delivery date .
For example, to offset 10 long contracts to buy June liquid natural
gas, you would need to short 10 contracts to sell June liquid natural
Know the Risks
For energy commodities and
associated futures contracts, risks are often related to supply and
storage availability . For agricultural commodities and associated
futures contracts, such as corn, soybeans, or wheat, the risks are
often weather related . Meanwhile, metals such as gold, copper, and
palladium and their futures contracts are affected generally by
industrial and macroeconomic factors . Whether the pool you plan to
invest in focuses on a single commodity or a broad mix of commodities,
you should research the risks associated with the commodities and the
industries that utilize them . You should know what conditions could
influence their prices and actively monitor those conditions while you
participate in the fund .
In addition, there is a risk that the
pool’s holdings or strategies could shift to compensate for changes in
market conditions . The pool’s disclosure documents will describe its
objectives, trading strategies, principal risks, and flexibility to
make changes . Read these disclosures thoroughly and watch for
updates, notices, or supplements on the fund’s website
Commodity pool disclosure documents also must include
information about the following: Management and Firm Principals . The
names of the pool operator, pool managers, and commodity trading
advisors, as well as ownership information and registration status .
Fees and expenses . Management fees, advisory fees, brokerage
fees and commissions, and interest paid .
. A table showing the amount the pool must earn after one year (in
dollars and percentage terms) to recover the amount of your initial
investment plus fees and expenses .
Performance . The pool has
to accurately report its past performance .
information . How to redeem shares in the pool, including any
restrictions that may exist .
The Impact of Rolls on Annual
Finally, rising commodity prices may actually create a
drag on commodity pool annual returns . The only way for a pool to
maintain an ongoing position in a particular commodity futures
contract would be to conduct a “roll”—closing out the expiring
contract (also called the “near” or “front-month” contract) and
entering another contract with a later delivery date (called “out-
month” contracts) . If the prices for out-month contracts are
increasing, then the pool may lose money each time front-month
contracts are rolled . Small increases in price, month over month,
could be a sizable drag on annual returns when added to applicable
trading and management fees . By contrast, when out-month contract
prices decrease, it could have the opposite effect and result in a
“roll yield . ”
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