Daily ETF Watch: Smart Beta & Commodities

New benchmark targets commodities via a factor-based approach.

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Reviewed by: Rebecca Hampson
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Edited by: Rebecca Hampson

New benchmark targets commodities via a factor-based approach.

S&P Dow Jones Indices has teamed up with Research Affiliates to launch the Dow Jones RAFI Commodity index. The rollout comes only two months after S&P DJI debuted the Dow Jones Commodity index, which followed in the wake of the DJ-UBS Commodity Index being rebranded as the Bloomberg Commodity Index earlier this year.

The Dow Jones RAFI Commodity index uses the Dow Jones Commodity Index as its starting point, but under- and overweights individual commodities within each of the parent index’s three equal-weighted sectors.

Weightings of individual components are based on their momentum and roll yield. In contrast, components of the DJCI are weighted by liquidity as determined by a five-year average of their total dollar value traded.

The DJCI, launched earlier this year, is designed to serve as a broad-market commodity index offering diversification and liquidity as its main characteristics. It is made up of 23 of the commodities currently included in the broad, world production-weighted S&P GSCI. Unlike either the DJCI or the S&P GSCI, the Dow Jones RAFI Commodity Index is specifically designed to generate outperformance through its factor-based approach, according to a press release.

“The Dow Jones RAFI Commodity Index intends to provide investors the potential to achieve alpha-like returns within an index strategy by weighting according to fundamental factors in commodities,” said Jodie Gunzberg, S&P DJI’s global head of commodities.

“While first-generation commodities indices have delivered on diversification and inflation protection, the low and very volatile returns have kept many investors out of the asset class. Yet the finance literature shows momentum and roll yield are simple and reliable sources of added returns,” added Jason Hsu, co-founder and vice chairman of Research Affiliates.