There's no real "market cap" of a commodity, so we've had countless debates here at IndexUniverse about whether the best proxy to determine weights is production, consumption or open interest on futures contracts.
Some commodities indexes, like the Rogers indexes, attempt to determine each commodity's "economic importance," and then use that figure to determine weights.
I want to propose a new way, which may not be academically rigorous, but interesting all the same.
While working on our Commodities ETF Analytics launch this month, I was surprised to notice how unevenly assets were spread across different types of commodities, so I decided to construct indexes based upon ETF/ETN assets.
After all, most of the popular commodities ETFs and the indexes they track make relatively heavy allocations to energy and light allocations to the precious metals.
The five most popular commodities ETPs on the market right now and their assets are:
- PowerShares DB Commodity Index Tracking Fund (NYSEArca:DBC), $6.53 billion
- iPath Dow Jones-UBS Commodity Total Return ETN (NYSEArca:DJP), $1.94 billion
- iShares S&P GSCI Commodity-Indexed Trust (NYSEArca:GSG), $1.15 billion
- ELEMENTS Rogers International Commodity - Total Return ETN (NYSEArca:RJI), $649.2 million
- United States Commodity Index Fund (NYSEArca:USCI), $483.1 million
The breakdown of specific commodities in each of the funds is as follows:
Index 1:ETP AUM Commodity Index
None of the basket funds allocate much to gold or other precious metals, so this ETP AUM Commodity Index doesn't look like any of them. Really, it looks like the SPDR Gold Trust (NYSEArca:GLD), which accounts for about 70 percent of all single-commodity ETP assets.
Given GLD's dominance, I thought it'd be interesting to get rid of the physical metal funds and see what the resulting basket of single-commodity ETPs would look like.
After all, the commodity-basket ETPs on the market are currently all entirely based on futures. The top five commodities look pretty similar, but the heavier weightings shift from the precious metals into energy. I'll call this one the ETP AUM Commodity ex-Physicals Index.
Index 3:ETP AUM Commodity Sector Index
None of the five broad ETPs mentioned above come close to matching the ETP AUM Commodity Sector Index's massive allocation to agriculture or miniscule allocation to energy, though USCI comes the closest.
I have two possible interpretations of the AUM-based indexes.
The first is based on the assumption that commodities ETP investors are buying broad-basket funds and using the single-commodity and sector ETPs to supplement their basket exposure to get the allocations they like. That interpretation would imply that investors want a basket with more exposure to agricultural commodities and precious metals, mostly gold.
The other interpretation assumes that the investors buying single-commodity and sector ETPs are doing so tactically and are not, at the same time, also buying an imperfect basket that requires supplementation. That interpretation is less actionable, unless you're a follow-the-money investor.
Ultimately, the choice of commodities exposure will come down to your own investment ideas and the fund or combination of funds that best fit those ideas.
And, fortunately, investors do have plenty of choices. There are currently 109 unleveraged exchange-traded commodities products on the market, so in all likelihood the products are out there to fit most everyone's needs.
At the time this article was written, the author held shares of DBC. Contact Carolyn Hill at firstname.lastname@example.org.
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