HAI: What kinds of futures contracts are tied to the index?
Rogers: The contracts that are in this index trade on the public exchange somewhere.
When I was starting the index, I went to the folks at the Journal of Commerce Index, for instance, which included things like hides and tallow. I said, “Well that’s wonderful, but you’ve got to have something with public visibility. I don’t want to have to call up 16 guys to find out the price of hide.” It’s got to trade on a public market to ascertain the liquidity and the actual price. So everything in the index trades on a market somewhere. And by the way, these things have a habit of getting more liquid. Crude oil, for instance, didn’t trade on exchange at all, until the 1980s. And now of course it’s the most traded of any commodity.
We only invest in the second-nearest month. This is designed to be a pure reflection of commodity prices. The only way you can do that is to use the spot month, but obviously you can’t use the spot month because you’re subject to delivery or various kinds of distortions. So I had to use the second-nearest contract as the closest reflection of the actual cost of doing business.
This was designed to be a pure, simple index. It was not designed to be actively managed in any way. Index investing outperforms 70 or 80 percent of active managers year after year after year. There are plenty of people to confirm that; it’s not coming from me.
HAI: How much capital is tied to your index?
Rogers: I’ve asked my office not to let me know. It’s a little bit like my books. I told the publisher not to show me how many copies I’ve sold, because I’m afraid I’ll jinx it.
I will say that this index is not nearly as used as the others, partly because I’m not Goldman Sachs. I don’t have thousands of salesmen out peddling my index. That’s a shortcoming. I’m thinking about a way to somehow try to improve that shortcoming. Because as I’ve said before, intellectually it’s the best constructed index; performancewise it’s the best-constructed index. And all the ones who try to take pot shots at it are pretty simple-minded, like the other index guys who say, “Oh we don’t have small weightings of anything.” To repeat, they should look at the S&P 500 and lots of other indexes too, which are successful with very small weightings.
HAI: In terms of general commodity investing, what are some of the mistakes that you see investors commonly make?
Rogers: They make the same mistakes investing in anything. They use too much leverage. The great advantage of commodity investing is you can use enormous leverage. The great disaster of commodity investing is you can use enormous leverage. Everybody in the world has a story about a brother-in-law who went broke investing in soybeans. But you don’t have to invest that way. When I set up the original fund, the point was to use no leverage so that the index and the fund would give a reflection of the cost of doing business.
But the main mistakes are just what people make in everything. A lot of people invested in dot-coms, but they had no clue what a dot-com was. People bought dot-coms on enormous leverage having no clue what they were doing, not understanding the risk of leverage and knowing little about dot-com businesses.
HAI: Do you think the introduction of ETFs minimized some of those mistakes?
Rogers: Well, as far as I’m concerned, ETFs are a wonderful thing. It makes life easier for a lot of people. It minimizes your tax consequence. If you invest in a mutual fund, your expenses are higher; because the portfolio manager is always buying and selling, you have tax consequences. ETFs are much, much better. There are ETFs that use all sorts of wonderful financial engineering, which I’m sure I wouldn’t understand. But I don’t bother with them. As long as you’re just investing in a simple ETF that doesn’t have a lot of financial engineering, I think they’re wonderful. But even the ones with the financial engineering, if they’re done properly, fine. It’s like any fund that’s got financial engineering: As long as they know what they’re doing, it’s fine.