The director of S&P Indices’ commodity indexes talks about index characteristics commodity investors should seek out.
When it comes to commodity indexes, the S&P GSCI is often considered the benchmark for the sector. Incorporating all commodity sectors and using a production weighting methodology, the index has hundreds of billions of investment dollars tracking it as well as other commodity indexes in the company’s index arsenal. HAI Managing Editor Drew Voros recently spoke with Jodie Gunzberg, director of S&P’s commodity indexes. Gunzberg talked about the company’s flagship commodity index and how it offers diversification and inflation protection; the importance of energy in an index; and active versus passive management when it comes to commodity investing.
HardAssetsInvestor: Anything out there in the commodities world that has surprised you so far in 2012?
Jodie Gunzberg: Well I don’t think too much about what is interesting about commodities until there’s a surprise, and it’s usually an upside surprise because there are supply shocks; so things like the EU and U.S. sanctions on Iran, the Sudan/South Sudan political pressures, what’s going on in Yemen. All of that pressures supply, which in turn actually supports the price.
An example for the other side — a demand shock — would be something like a mad cow scare that would send the prices of meat down. Demand shocks happen a lot less frequently than supply shocks. That’s one of the characteristics of commodities.
HAI: Your commodity index, the S&P GSCI, is well known to most commodity investors. What are some of the other indexes in the S&P family that commodity investors should be aware of?
Gunzberg: We actually have quite a number of commodity indexes at S&P and, of course, the S&P GSCI’s our flagship index. Beyond that, we have a family of modified-weight indexes. The S&P GSCI Light Energy Index is one of the more popular ones, along with the S&P GSCI Equal Weight Select. Those types of indexes are for investors who are looking for a commodity exposure with potentially less energy.
We also have modified-roll indexes. The S&P GSCI sits in the front-month contract and these modified-roll indexes fit in different spots. So we have a multiple-contract index — the S&P GSCI Multiple Contract — which we recently launched this year that sits in the first, second and third month forward. We’ve got forward indexes such as S&P GSCI 3-Month Forward that are one, two, three, four or five months forward. We’ve got an enhanced index — the S&P GSCI Enhanced Index — which has been around for quite a while, and was launched about the same time as the S&P GSCI, which modifies the roll of the eight hardest-to-store commodities. And why that’s important is that those hardest- to-store commodities are the commodities that have the biggest costs from rolling. They have the most severe curves when in contango.
We also have a newer launch that’s been really popular — the S&P GSCI Dynamic Roll Index — and that changes the roll on all 24 commodities.
HAI: And that’s designed to avoid contango?
Gunzberg: It’s designed to minimize contango and also to reduce trading costs. It doesn’t go to the single contract that has the least contango every month, but it might go to the one that’s the second-least contango or third or fourth, depending on the cost-benefit analysis.
HAI: Going back to S&P’s flagship commodity index, S&P GSCI, it’s up about 6 percent this year. What’s driving the index this year?
Gunzberg: Well, it’s mostly been the petroleum sector. Oil’s been up quite a bit. Brent crude oil, which is the second-heaviest constituent in the index, has been up more than 16 percent this year. That’s been a pretty big contributor. Even WTI crude is up at about 3 ½ percent up, but it’s more than 30 percent of the index, so that’s quite a big contributor as well.
HAI: Why does an index heavily weighted in energy make more sense than other commodity indexes?
Gunzberg: The index is a production-weighted index. If you believe something like the S&P 500 — which is a market-cap-weighted index — is a representative beta of the equity space, then the analogous situation in commodities is production weight. And the production weight yields a heavy energy because that’s the way that the world looks: There’s just more energy produced than there is corn or gold.