Merrill Lynch Launches Commodity Index

June 28, 2006

Merrill Lynch says that it puts an emphasis on "downstream" commodities, which it says have historically had a stronger long-term performance than "upstream" components. For instance, it has a relatively higher weighting of live cattle vs. corn (you can think of corn as cattle feed).  Cows, it says, have trounced corn over the past 70 years.

Using its weighting system and unique roll methodology, Merrill Lynch says its index would have outperformed other major indexes over the past twelve years:

Notably, Merrill does not include the Deutsche Bank Commodities Index in its comparison. The DBC has been the best performing commodities index in recent times, and now uses a flexible roll strategy comparable to the Merrill Lynch index to capture the highest yield.

With all these methodology tweaks based on historical data, one has to keep in mind the question of hindsight. While its nice to see all these innovations in the commodities indexing space - new roll methodologies, new weighting schemes - you can't help but feel that they're all a little backward looking.  Commodities markets have recently been strongly in contango, with negative roll yields on front-to-second month rolls.  Given that, it's not surprising to see indexers embrace methodologies that move away from front-to-second rolls.

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