Yale School of Management

Oil, ETFs and Speculation


Commodities markets date to the trading of livestock and the use of rare, standardized items such seashells as commodity money by the ancient Sumerians.  Since the markets' very origins, traders have sought to standardize wares in order to increase market liquidity.  However, investing in commodities has proved challenging to the average investor.  Physical commodities often require costly storage, and most investors cannot manage inventories.

The futures market appears to assuage these problems, but suffers from limitations of its own. Indeed, every futures contract eventually expires, and an investor who fails to sell his in time must take delivery of the physical commodity.  Buying futures with far-out expirations appears to be a solution, but the markets get progressively more illiquid as one wanders further from the near expiration months.  Thus, one way or the other, one faces either illiquidity costs  or rollover costs such as time spent trading, commissions, and bid/ask spreads.  In addition,  investing in futures differs significantly from investing in physical commodities, and complications may arise from many directions.

Faced with a clear investor demand for easy access to commodities exposure and so many difficulties with the pre-existing system, 21st century innovators started seeking solutions.  Financial instiutions have created Exchange Traded Funds (ETFs) for many commodities. But how have these financial instruments fared?

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Teaching Note:
Suggested Citation:

So Alex Roelof, K. Geert Rouwenhorst, and Jaan Elias, “Oil, ETFs and Speculation,” Yale SOM Case #09-029, July 28, 2009

  • Asset Management
  • Financial Regulation
  • Investor/Finance