Characteristics and Performance of Commodity Indexes

Investment products based on futures-based commodity indexes are thriving in recent years. However, the index methodology and performance characteristics of these commodity indexes are not well understood by investors. This study reviews and analyzes four major investable commodity indexes: S&P Goldman Sachs Commodity Index (S&P GSCI), Dow Jones-UBS Commodity Index (DJ-UBSCI), Thomson Reuters/Jefferies CRB Index (TR/J CRB) and Rogers International Commodity Index (RICI). The results from risk and return analysis show that the RICI, the most diverse commodity index, has the best performance over various investment horizons. The S&P GSCI, an energy-focused index, has the highest volatility, and the DJ-UBSCI, a broad-based index with weighting constraints, has the lowest volatility. Commodity indexes are closely related to each other, and the commodity indexes have a weak positive correlation with the S&P 500 equity index. Johansen cointegration tests show that the four major commodity indexes are distinct from one another and serve different purposes.