Just what are you investing in when you invest in commodities ETFs?
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:
Sector Allocations of the Top 5 Basket Commodities ETPs
Those five commodities funds look very different than the fund that would result from combining all the single-commodity ETPs on the market, which would be almost entirely a gold fund.
I looked at each single-commodity ETP on the market—that is, any fund that specifically tracks one commodity, be that gold, wheat, copper, etc.—then weighted each commodity by the assets tied to it, and called it the ETP AUM Commodity Index.
My ETP AUM Commodity Index’s top five holdings are below:
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 2: ETP AUM Commodity ex-Physicals Index