A new index from Dow Jones and RAFI addresses a real issue.
Commodities are notoriously hard to index. While rational people argue about how to make an equity index, it’s fairly easy to agree on a few basic principles like “what is a large-cap stock,” or even more fundamentally, “what’s a stock.”
In commodities, there’s no such common ground. Otherwise-rational people in the commodities world rarely agree on things as simple as whether gold is even a commodity that should be indexed, or which version of oil (Brent or West Texas crude oil) should be included.
A Nightmare Of Choice
The end result for investors has for the most part been a bit of a nightmare. Consider the returns of the largest commodity ETFs over the last few years:
These are five ETFs all purporting to give you broad exposure to the commodity markets, a classic source of diversification in a sophisticated portfolio. Every one of them is a seemingly logical take on the space.
At the bottom, we have the iPath Dow Jones-UBS Commodities ETN (DJP | B), which has been a pretty consistent underperformer. It’s also extremely odd, in that despite enormous assets of more than $1.5 billion, it tracks an index that no longer exists.
The DJ-UBS commodity indexes became the Bloomberg Commodity Indexes in July, and nobody at Barclays seems to have noticed or bothered to update the ETN’s name, prospectus, fact sheet or website. The index used to and presumably still does track a simple index of 19 commodities using front-month futures and caps on exposure to keep things somewhat balanced.