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  • Why futures contracts are actually less risky than stocks




    CHAPEL HILL, N.C. (MarketWatch) — Regardless of what you think about commodities futures, you’re probably wrong.

    That’s because commodities are one of the most misunderstood asset classes in the entire investment arena. And that’s really saying something, since there is considerable misunderstanding about other asset classes as well.

    One reason there’s been so much misunderstanding about commodities futures is that, until now, long-term historical data were unavailable. So analysts were largely shooting in the dark when trying to draw statistically robust conclusions about those contracts’ behavior. Unscrupulous commentators could get away with saying almost anything they wanted about commodities futures without fear of being contradicted by the data.

    Fortunately, that situation has changed, courtesy of work conducted by two Yale professors: Gary Gorton and Geert Rouwenhorst. Beginning a decade ago, they have been carefully maintaining a comprehensive index of commodities futures contracts that dates back to 1959, more than five decades’ worth. Along with a colleague at SummerHaven Investment Management, they recently completed an analysis of this dataset through the end of 2014.

    Here are five under-appreciated facts about commodities futures:

    Fact 1: Commodities are actually more conservative than stocks
    Believe it or not, commodities futures are actually less risky than the broad stock market, about 14% less, in fact, as measured by the standard deviation of annual returns. The source of commodities futures’ much-vaunted riskiness is not the commodities themselves, but the ability to invest in them on very little margin.


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