S&P Dow Jones Indices today launched a risk-weighted version
of the S&P GSCI Index, in the latest riff on the GSCI index
aimed at perfecting the first-generation version of the index that
some argue has become irrelevant, as futures-based commodities
investing has evolved in recent years.
The S&P GSCI Risk Weight Index will offer up diversified
exposure to the commodity spectrum by allocating no more than 33
percent to one commodity sector. The index will weigh the risk
factors associated with each of the five commodity sectors as
defined by S&P Dow Jones Indices as precious metals, industrial
metals, energy, livestock and agriculture.
The original GSCI index, on which GSG is based, has been
criticized for allocating too heavily to the energy sector,
limiting exposure to a truly broad-based commodity portfolio. For
example, the iShares' S&P GSCI Commodity Indexed Trust
(NYSEArca:GSG), an exchange-traded product based on the original
iteration of S&P's GSCI index that has $1.05 billion in assets,
is currently allocated 70 percent to energy.
"The S&P GSCI Risk Weight allows us to measure the
commodities beta provided by the S&P GSCI with a focus on a
balanced risk contribution from each sector," Jodie Gunzberg, head
of Commodity Indices at S&P Dow Jones Indices, said in a press
One thing the new index doesn't do is mitigate contango-a highly
fertile area of product development in the ETF industry that
investors have responded to by plowing money into such strategies.
But in 2011, the index provider did unveil the S&P GSCI Dynamic
Roll Index, which works to mitigate contango by owning contracts
for a given commodity that create the least "negative roll
Contango occurs in the futures market when distant futures'
prices exceed the cost of futures for more immediate delivery, so
that fund managers, when they maintain exposure as contracts
expire, have to pay more for contracts they are rolling into than
they receive for contracts they liquidate. Those price differences
eat into returns, and significantly over time.
The poster child for successful contango-mitigating
is the PowerShares DB Commodity Tracking Fund (NYSEArca:DBC), which
has $6.42 billion in assets. The United States Commodity Fund
(NYSEArca:USCI), a more recent entrant, now has $487 million in
assets, according to data compiled by IndexUniverse.
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