The new Dow Jones Commodity Index is designed to serve as a broad-market commodity index offering diversification and liquidity as its main characteristics.
The new index is made up of 23 of the commodities currently included in the broad, world production weighted S&P GSCI. However, the new index weights each of the three major sectors - energy, metals, agriculture and livestock - equally. The index’s construction is meant to be simple in order to facilitate its use as an equally weighted beta, or to serve as a building block for modifications.
Jodie Gunzberg, head of commodities at S&P Dow Jones Indices, said in a statement: “With today’s announcement of the Dow Jones Commodity Index, market participants will have the advantage of using an index based upon a simple design that can serve as both a balanced, diversified, and liquid benchmark and as an underlying for potential investment products.
“In speaking with market participants, it became apparent that there is a clear need for a commodity index that is highly liquid, avoids large sector weights, is transparent in its methodology, and is independently governed. The Dow Jones Commodity Index meets each of these criteria and fills an important gap in the marketplace.”
The Dow Jones Commodity Index is rebalanced quarterly and according to the methodology, because of the equal weigting strategy only one commodity component within a sector can reach a maximum weight of 35 percent. If there is any component above 35percent, it is capped at 32 percent and any excess weight is distributed proportionately among the remaining components. No remaining component’s weight can exceed 20 percent. If any remaining component’s weight is above 20 percent, it is capped at 17 percent and the excess weight is distributed proportionately among the remaining components.
Commodities are weighted by relative liquidity based on the five year average total dollar value traded (TDVT), and include only those commodities that are included in the methodology of the S&P GSCI. Currently, Gasoil is excluded from the index due to the uncertainty around the contract at the time of index construction, though it may be reviewed for inclusion in the 2015 reconstitution.