Nasdaq Launches Commodity Indexes

April 18, 2012

Nasdaq to offer wide variety of commodity indexes with different futures contract exposures.

The Nasdaq Global OMX Index Group is rolling out a family of 450 commodity indexes on April 23 that is designed to measure the performance of single commodities as well as sectors through the use of futures contracts.

The new Nasdaq Commodity Index family consists of a broad benchmark, an open interest and liquidity-based index, 33 single indexes and five major sectors that include energy, industrial metals, precious metals, agriculture and livestock. Narrower sectors include petroleum, grains and softs.

Most futures-based commodity index families base their indexes on the same roll strategy, be that simple or optimized. However, Nasdaq will be the first index family that offers each of its indexes in five different roll structures—these allow investors to choose whether they prefer to brave the generally higher contango and volatility that accompanies the front-month contracts or higher price risk that accompanies the more distant contracts.

The five different roll schedules include ones that maintain exposure to the first-, second- and third-month futures contracts, as well as indexes that hold each second- and third-month futures contracts to maturity before rolling into the next second- or third-month contract. Nasdaq rolls its exposure over the first five trading days of the month.

The choice of futures contract can have a big impact on the returns you experience as an investor, due to the forces of contango. Contango occurs when the price of the next futures contract is higher than the current contract.

However, contango isn't necessarily consistent across the futures curve—it could be steeper in the front-month contract than in the second or third.

Looking at the gold chart, for example, you can see that it costs a lot more right now to roll from the April contract into the August or October contracts than it does into the May contract.

Gold Curve

Source: Contango report 4/16/12


Similarly, an investor rolling from the May soybeans contract into the July would lose money on the transaction, while if he rolled into July or August he would make money.

Soybeans Curve

Source: Contango report 4/16/12


The oldest commodity indexes, like the S&P GSCI and Dow Jones-UBS Commodity, are based upon the nearby month, or front-month contracts, which generally are more liquid than futures contracts further out on the curve. In contrast, many of the newer indexes optimize the contracts they choose to invest in to try to mitigate contango.

The Nasdaq family of commodity indexes is certainly an interesting approach, though of course an index is not investable until someone creates a fund tied to it, so we'll have to wait and see how the issuer world reacts.


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