Commodity index provides traders an opportunity get exposed to a basket of commodities, measuring their performance.
Indices open up investors an easier access to commodities without direct exposure to futures. The indices are traded on an exchange the same way as stock index futures trade and the value of these indices fluctuate according to the movement of underlying commodities. Components determine the index value and the value varies from one index to other based on their percentage exposure to the constituents. They also vary in the way they are weighted; some indexes, for instance, are equally weighted and others have a predetermined, fixed weighting scheme.
In Rogers International Commodity (RIC) Index, the value is tracked via futures contracts on 38 different exchange-traded physical commodities, listed in 13 exchanges in 6 countries, quoted in 5 different currencies. The Reuters/Jefferies CRB Index, which is traded on the NYBOT, comprises 19 different types of commodities ranging from metals to agricultural products. The S&P GSCI composite index represents an unleveraged, long-only investment in commodity futures.
Index rebalancing refers to redefining the weight of individual underlying commodity share in the index. For instance, the following indices undergo periodic rebalances in terms of weight of underlying commodities on an annual or biannual basis:
- Commodity Research Bureau (CRB) Index
- Goldman Sachs Commodities Index (GSCI)
- Rogers Raw Materials Index (RRMI)
- Dow Jones-AIG Commodities Index (DJ-AIG).
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