Commodity Mutual Funds Part 3: Fees, Selection, and Analysis
Book: Commodities: Markets, Performance, and Strategies
Editors: H. Kent Baker, Greg Filbeck, Jeffrey H. Harris
Publisher: Oxford University Press, 2018
ISBN: 9780190656010
The Fee Landscape
This is Part 3 and the final piece on Chapter 14. We are wrapping up commodity mutual funds by looking at fees, persistence of returns, and what it all means for investors.
Fees matter. A lot. The chapter makes clear that CMF performance is negative on a risk-adjusted basis after fees. So understanding what you are paying is not optional – it directly determines whether your investment makes sense.
Mutual fund fees come in several flavors:
Sales loads are commissions paid to brokers. Front-end loads are charged when you buy shares. A 5% front-end load on a $1,000 investment means only $950 actually gets invested. Back-end loads are charged when you sell and typically shrink the longer you hold. Not all funds have loads, but many CMFs do.
Ongoing fees include management fees (for the portfolio manager’s stock-picking ability and the fund’s operating expenses), 12b-1 fees (marketing costs passed to investors), and other administrative expenses.
The expense ratio is the sum of all ongoing fees divided by average net assets. This is the number most investors look at, and for good reason. It compounds every year and directly reduces your returns.
How CMF Fees Have Changed
The good news: expense ratios have been declining over time. The chapter shows a clear downward trend in CMF expense ratios across the 1996-2016 sample period. As of the end of the sample, average expense ratios were around 1% on a value-weighted basis.
Some patterns in the data:
Equally weighted expense ratios are higher than value-weighted ratios by about 25 basis points. This means smaller funds charge more. Makes sense – they have fixed costs spread over a smaller asset base.
Gold CMFs consistently had higher expense ratios than the overall CMF category. If you are investing in gold mining companies through a mutual fund, you are paying a premium for it.
Energy CMFs historically had lower expense ratios than gold and other CMFs, though by the end of the sample all three categories had largely converged near 1%.
But here is the thing: even 1% per year adds up. Over 20 years, a 1% annual expense ratio will consume about 18% of your investment’s value through compounding. And that is before sales loads, commissions, and taxes.
Do Winners Keep Winning?
One of the most important questions for any fund investor: if a fund performed well last year, will it perform well next year?
The chapter tested persistence by sorting funds into quartiles based on their alpha and seeing if top-quartile funds stayed on top in subsequent years. The results were not encouraging.
Over the full sample period, there was very limited evidence of persistence in CMF returns. Past performance was a poor predictor of future results. This is consistent with the broader mutual fund literature (Fama and French 2010 found similar results across the whole mutual fund industry).
During specific sub-periods, some persistence showed up. During the commodity boom, funds that generated positive alpha tended to continue doing well for a while. But this kind of time-period-specific persistence is hard to exploit in real time because you do not know when the good period will end.
The bottom line on persistence: do not chase last year’s best-performing commodity fund. The odds that it will repeat are not much better than random.
Turnover: Trading More Means Earning Less
The regression analysis from Part 2 found that fund turnover ratio was negatively correlated with alpha. Funds that traded more frequently had worse risk-adjusted performance than less active funds.
This finding is powerful because it applies across fund types and time periods. Every time a fund manager buys or sells a position, the fund incurs transaction costs (commissions, bid-ask spreads, market impact). These costs are not part of the expense ratio but they still reduce returns. Funds with high turnover are racking up hidden costs that investors do not always see in the published fee disclosures.
For investors, this suggests a preference for funds with lower turnover, all else being equal. A fund manager who trades less but picks better positions is worth more than one who is constantly reshuffling the portfolio.
Fund Size Matters
Bigger CMFs tended to have better risk-adjusted performance. The authors found a positive correlation between AUM and alpha that held across most fund types and time periods.
Why would bigger funds do better? A few possible explanations:
Economies of scale. Larger funds can spread fixed costs (research, compliance, administration) over a bigger asset base, resulting in lower effective costs per dollar invested.
Better access. Large fund companies like Vanguard, Fidelity, and PIMCO have extensive research departments, better data, and more connections in the industry.
Survivorship selection. Funds that grow large probably grew because they performed well in the past. This does not mean they will continue to outperform, but it does create a statistical relationship between size and historical alpha.
This is good practical advice for investors: if you are going to invest in a commodity mutual fund, bigger is generally better. The Vanguard Energy Fund at $10 billion has structural advantages that a $50 million niche fund does not.
CMFs vs. Commodity ETFs
One thing that comes through clearly in Chapter 14 is that CMFs are not the best way to get commodity exposure if that is your primary goal.
The correlations tell the story. CMF returns correlated more with the stock market (0.63) than with commodity prices (0.39). Gold CMFs correlated more with overall CMFs (0.79) than with the actual gold price (0.35).
By contrast, commodity ETFs that hold physical commodities or futures can achieve correlations above 0.99 with spot commodity prices (as we saw in Chapter 13 with the iShares Gold Trust).
So what is a CMF actually good for? It is a way to own commodity-related equities in a diversified, professionally managed portfolio. If you believe that oil company stocks will do well, or that gold mining stocks will outperform, a CMF makes sense. But if you want pure commodity price exposure, an ETF is the better tool.
Chapter 14 Summary: The Full Picture
Pulling together all three parts of the Chapter 14 retelling, here are the key takeaways:
On structure: CMFs are actively managed investment companies that mostly invest in commodity-related equities. They trade at end-of-day NAV, not on exchanges. They are more liquid and transparent than hedge funds but less efficient at tracking commodity prices than ETFs.
On performance: CMFs delivered strong returns during the commodity boom (2004-2008) but weak to negative returns post-2011. On a risk-adjusted basis, the average fund destroyed value over the full sample period. Only larger funds showed consistently positive alpha.
On fees: Expense ratios have declined over time to about 1% but still meaningfully reduce returns. Sales loads, turnover-related costs, and tax inefficiency further erode investor returns. Higher-fee funds did not deliver better performance.
On persistence: Past winners are not reliable future winners. There is little evidence that CMF performance persists across time periods.
On fund selection: If you must invest in a CMF, the data suggests favoring larger funds with lower turnover ratios and lower expense ratios. Avoid chasing recent performance. And be clear about what you are getting – commodity-related equity exposure, not direct commodity exposure.
The chapter by Camilo, Cizel, and Zurek is a thorough, data-heavy piece of work. It does not make commodity mutual funds look very attractive on average, but it gives investors the information they need to make informed decisions. And honestly, that is exactly what good academic research should do.
Previous: Commodity Mutual Funds Part 2: Performance and Returns