Saturday, May 7, 2011

The Famous Commodity Indices

Commodities have historically been positively correlated with the rate of inflation and negatively correlated with returns of stocks and bonds. Commodity indices provide investors with a reliable and publicly available benchmark for investment performance in the commodity markets, just as what the S&P 500 do their respective markets. Several unit trusts and ETFs are benchmarked against these indices.

Four of the most quoted commodity indices are:

1. The Dow-Jones-AIG Commodity Index
The Dow-Jones-AIG Commodity Index is a rolling commodities index composed of futures contracts on 19 physical commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME). The index serves as a liquid and diversified benchmark for the commodities' asset class. Sixteen of the contracts are traded on U.S exchanges while the other three are traded in London, with none based in Asia. This means it does not include rice, a staple of a large percentage of the world's population.

2. The Thomson Reuters/Jefferies CRB Index
The Thomson Reuters/Jefferies CRB Index was launched in 1957. The components of this index were, until 2005, equally weighted. This resulted, for better or worse, in orange juice having the same weight as crude oil. With the makeover, component weights are assigned and rebalanced monthly. For example, crude oil has a fixed weighting of 23 percent. If its weight rises to 30 percent because crude oil prices have gone up relatively more than other commodities, the weight is rebalanced back to 23 percent.

The history of the Thomson Reuters/Jefferies CRB Index dates back to 1957, when the Commodity Research Bureau constructed an index comprised of 28 commodities that made its inaugural appearance in the 1958 CRB Commodity Year Book.

Since then, as commodity markets have evolved, the Index has undergone periodic updates to remain a leading benchmark for the performance of commodities as an asset class.

The Index was renamed the Reuters/Jefferies CRB Index in 2005 when it underwent its tenth revision - as the collaborative effort of Reuters (now Thomson Reuters), the global information company, and Jefferies Financial Products, LLC - to maintain its continued accurate representation of modern commodity markets. The Index was renamed the Thomson Reuters/Jefferies CRB Index in 2009 to reflect the 2008 combination of the Thomson Corporation and Reuters Group PLC.

3. The Goldman Sachs Commodity Index (GSCI)
The GSCI Was created in 1992 and is made up of 24 commodity components. The goal of the GSCI is to measure commodities in a way that reflects their current importance in the global economy. More weight is automatically allocated to commodities that have risen in the price. As a result, a large proportion of the index is weighted towards energy as crude oil stays above US$100 per barrel.

GSCI is designed to provide investors with a reliable and publicly available benchmark for investment performance in the commodity markets comparable to the S&P 500 or FT equity indices.

In summary, GSCI is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The combination of these attributes provides investors with a representative and realistic picture of realizable returns attainable in the commodities markets.

4. The Rogers International Commodities Index (RICI)
The RICI index was designed by the famous commodities investment guru James B. Rogers, Jr. (“Rogers”) in the late 1990s. RICI is a composite, U.S. dollar-based, total return that was designed to meet the need for consistent investing in a broad based international vehicle; it represents the value of a basket of commodities consumed in the global economy, ranging from agricultural to energy and metal products. The value of this basket is tracked via futures contracts on 37 different exchange-traded physical commodities, quoted in five different currencies, listed on thirteen exchanges in six countries.

The RICI aims to be an effective measure of the price action of raw materials not just in the United States but also around the world. Indeed, the index's weights attempt to balance consumption patterns worldwide (in developed and developing countries) and specific contract liquidity.

The RICI index includes commodities that do not appear in other indices such as: rice, rubber and lumber.

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