Not sure I completely agree with #1. Or at least, not for the reason mentioned. An OTC swap could give rise to credit risk if there is no CSA in place between counterparties, rather than that this has to do with something being exchange traded I would say?

As for the roll risk, an interesting comparison might be commodity indices such as for example the
DJAIG or the SPGSxxx indices. ETFs should be more or less similar to the total return variants oof those. Now most of these index providers started out with rolling 1st future strategies. More recently however, they seem to be marketing a sort of “constant maturity” versions of those where they actually spread theire exposure over the curve and only roll the front aprt of it regularly. If there aren’t ETFs doing sometihng like this already, I could imagine that this type of innovation is something that is to be expected for ETFs too.

Irreplication risk and roll risk sort of feel like the same type of risk to me but in different mmarkets. They both have to do with incurring a cost (be it a roll cost or a bond trading rich) because of self-induced demand by a succesfull ETF.

As for faddish risk, I don’t consider that to be a risk associated with investing in ETFs themselves (though it is a general investment risk). Investing in a hype/bubble/fad might be poor judgment, but resulting losses from them don’t have to with ETF specific risk; unless you consider it a risk that ETFs might liquiditate themselves because after a fad they don’t have enough AuM to be economical ; however those should be able to liquiditate at (more or less) NAV. The part where an ETF is a relative big holder of underlyings in a specific part of the market would be more part of the market size risk
and not faddish risk I’d say.

As for market size risk, there are two sorts of risk that have recently shown themselves (or at least as far as my understanding goes, but I’m definitely no expert). The first is an ETF becoming so popular that it becomes so big that the SEC doesn’t allow for it to create more fund units (I think this happend to UNG recently). The ssecond is that an ETF becomes a sizeable player in the market and the entire market knows in what position the ETF is (relates both to the roll risk and your irreplacbility risk).

Bob, remember my fusion solution piece?

http://alephblog.com/2009/08/21/fusion-solution-the-stable-value-fund-guide-to-commodity-etf-management/

This would save most commodity ETFs. They would track spot commodity moves over the long haul, but in the short run, the correlation with spot commodities would be diminished.

That said, any investment strategy that becomes too popular will eventually underperform. That is the way of the world. Look for productive ideas that others are not following.

The royalty trusts are not a bad idea, just keep the position sizing reasonable to account for downside risk.

I’m a very conservative investor and I’ve been looking for some inflation hedges and, in a less sophisticated way, found most of the commodity ETFs too problematic. I’m thinking maybe royalty trusts are probably a safer way to go (but a pain in the butt at tax time.)

Keep up the great work! You have helped me tremendously.