There are several ways of gaining an exposure to commodities, the most widely used being through exchange-traded funds (ETF). Through these, an investor can gain access to, and track the performance of, an individual commodity such as gold, a sector such as grains, or a broad exposure to the major commodities spread across the three sectors of energy, metals, and agriculture.
Three major indices – the S&P GSCI index, the Bloomberg Commodity index and DBIQ Optimum Yield Diversified Commodity Index – have become the industry-standard benchmarks for investors in commodities.
Commodity indexes: Different structures and strategy
The S&P GSCI, established in 1991, is an index calculated primarily on a world production-weighted basis. It is comprised of 24 physical commodities that are the subject of active, liquid futures markets. The weight of each commodity in this index is determined by the average quantity of production and is designed to reflect their relative significance in the world economy.
Due to this structure, the S&P GSCI is very heavily exposed towards the energy sector, with 61.5% of the index currently invested in products ranging from crude oil and fuel products to natural gas.
The Bloomberg Commodity Index (BCOM), established in 1998, has a more diversified approach. This index also comprises 24 physical commodities, all represented by active futures markets. No single commodity may constitute more than 15% of the index, no related group of commodities may constitute more than 33% of the index and no single commodity may constitute less than 2% of the index as liquidity allows.
The weightings for each commodity are calculated in accordance with rules designed to ensure that the relative proportion of each of the underlying individual commodities reflects its global economic significance and market liquidity.
Finally, the DBIQ Optimum Yield Diversified Commodity Index Excess Return is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world.
In our reporting, we tend to focus on the Bloomberg Commodity index, given its broad exposure across the different sectors. An example of this is precious metals, which only has a 4.1% exposure in the S&P GSCI as opposed to a 19.4% allocation in the BCOM. The below example shows the Invesco BCOM UCITS ETF and, while the price remains in a corrective descending triangle, the fact that it has so far only managed a 38.2% correction in the 2020 to 2022 rally points to a weak correction within a strong uptrend. More in this update from Kim Cramer, our technical analyst.