Commodity Price Index

A commodity price index is a fixed-weight index or (weighted) average of selected commodity prices, which may be based on spot or futures prices. It is designed to be representative of the broad commodity asset class or a specific subset of commodities, such as energy or metals.It is an index that tracks a basket of commodities to measure their performance. These indexes are often traded on exchanges, allowing investors to gain easier access to commodities without having to enter the futures market. The value of these indexes fluctuates based on their underlying commodities, and this value can be traded on an exchange in much the same way as stock index futures.

The constituents in a commodity price index can be broadly grouped into the following categories:

• Energy (such as Coal, Crude Oil, Ehanol, Gas Oil, Gasoline, Heating Oil, Natural Gas, Propane)
• Metals

• Base Metals (such as Lead, Zinc, Nickel, Copper)
• Precious Metals (such as Gold, Silver, Platinum, Palladium)

• Agriculture

• Grains (such as Cocoa, Corn, Oats, Rice, Soybeans, Wheat)
• Softs (such as Butter, Cotton, Milk, Orange Juice)
• Livestock (such as Hogs, Live Cattle, Pork Bellies, Feeder Cattle)

Investors can choose to obtain a passive exposure to these commodity price indices through a total return swap. The advantages of a passive commodity index exposure include negative correlation with other asset classes such as equities and bonds, as well as protection against inflation. The disadvantages include a negative roll yield due to contango in certain commodities, although this can be reduced by active management techniques, such as reducing the weights of certain constituents (e.g. precious and base metals) in the index.