CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

26.5 COMMODITY INDICES COMPARED TO SECURITIES INDICES

Commodity indices are an effective and efficient means for gaining access to the benefits of commodities. A commodity index is a group of commodity futures contracts. Commodity indices provide returns comparable to passive long positions in listed futures contracts. In order to gain long-term exposure, commodity futures contracts must be rolled from one maturity to the next before the expiration of the front-month contract. They attempt to replicate the returns one would generate through holding long positions in agricultural, metal, energy, or livestock futures contracts, without requiring the investor to actively manage the positions. The first generation of commodity indices, which includes the S&P GSCI, are long-only, are infrequently rebalanced, and ignore term structure in their weighting methodology. Second- and third-generation enhanced commodity indices have been developed in an attempt to improve returns by providing unique roll or weighting methodologies, rebalancing more frequently, or implementing rules-based trading strategies that utilize signals derived from futures market characteristics, such as momentum, term structure, and time to maturity.

The number of commodity indices available to investors has multiplied since the 1990s. A wide variety of commodity indices and subindices, both traditional and enhanced, are currently publicly available. While all indices offer a diversified exposure to commodity markets ...