Commodity Indices: Why It Is Important, Examples, Affecting Factors

What it is: A commodity index tracks the price performance of a selected basket of commodities. Index issuers assign weights to selected commodities, the percentages of which vary according to the respective methodology. Some use variable weights and some use average weights.

Why is the commodity index important

Commodity index is an alternative and a way to diversify the portfolio. That makes it easier for investors to invest in commodities without having to buy physically.

Due to the complexity of trading physical commodities, investors usually focus on the index futures of that commodity. They can then invest in commodities through these indices and earn a profit when the price of the underlying commodity rises.

Factors affecting the commodity index

The index value fluctuates, adjusting to the price movements of the underlying commodity. Many factors influence prices including supply and demand, weather conditions, the US dollar, world events, weather conditions or even geopolitics.

The weighting method also affects the index movement. Some indices may have uniform weights between commodities. Others may assign a higher percentage of weight to certain commodities.

Say, the index has a higher weight on energy commodities. Its movements will closely follow energy commodity prices. Long story short, the difference in weighting also makes the performance between commodity indices not uniform, even though using the same components.

Another factor is the reference price used. It also affects the index. Commodity trading involves a great deal of shipping. They differ in the destination or origin of delivery. For example, the price of palm oil for shipments from Malaysia will differ from those for shipment from Indonesia. Even though the destination is the same, say Rotterdam in the Netherlands, differences such as tariffs and taxes make the prices of the two different.

Finally, the delivery time of the futures contract also affects the price. Shipments for the next one month will have a different price than shipments for the next two or three months.

Example of a commodity index

The following is an example of a commodity price index on the global market:

  1. GSCI S&P
  2. Bloomberg Commodity Index (BCOM)
  3. Thomson Reuters Equal Weight Commodity Index (CCI)
  4. Credit Suisse Commodity Benchmark Index (CSCB)
  5. Refinitiv Equal Weight Commodity Index
  6. Refinitiv / CoreCommodity CRB Index
  7. Rogers International Commodity Index
  8. SummerHaven Dynamic Commodity Index

One great way to get exposure to a commodity in a portfolio is to invest in a commodity ETF. It tracks a wide range of commodities, including energy, base metals, precious metals, and agricultural goods. They are similar to mutual funds, but are listed on an exchange and can be traded just like common stocks. Here are the Top-20 commodity ETFs by total assets:

ETF Name Total Assets (000)
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF $ 2,554.17
Invesco DB Commodity Index Tracking Fund $ 1,063.47
iShares S&P GSCI Commodity-Indexed Trust $ 747.09
iPath Dow Jones-UBS Commodity ETN $ 497.59
Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF $ 299.11
iShares Commodities Select Strategy ETF $ 211.56
First Trust Global Tactical Commodity Strategy Fund $ 201.81
United States Commodity Index Fund $ 108.58
RICI-Total Return ETN $ 106.03
WisdomTree Continuous Commodity Index Fund $ 96.43

 

by Abdullah Sam
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