S'P Dow Jones Indices today launched a risk-weighted version of the S'P GSCI Index, in the latest riff on the GSCI index aimed at perfecting the first-generation version of the index that some argue has become irrelevant, as futures-based commodities investing has evolved in recent years.
The S'P GSCI Risk Weight Index will offer up diversified exposure to the commodity spectrum by allocating no more than 33 percent to one commodity sector. The index will weigh the risk factors associated with each of the five commodity sectors as defined by S'P Dow Jones Indices as precious metals, industrial metals, energy, livestock and agriculture.
The original GSCI index, on which GSG is based, has been criticized for allocating too heavily to the energy sector, limiting exposure to a truly broad-based commodity portfolio. For example, the iShares’ S'P GSCI Commodity Indexed Trust (GSG), an exchange-traded product based on the original iteration of S'P’s GSCI index that has $1.05 billion in assets, is currently allocated 70 percent to energy.
“The S'P GSCI Risk Weight allows us to measure the commodities beta provided by the S'P GSCI with a focus on a balanced risk contribution from each sector,” Jodie Gunzberg, head of Commodity Indices at S'P Dow Jones Indices, said in a press release.
One thing the new index doesn’t do is mitigate contango—a highly fertile area of product development in the ETF industry that investors have responded to by plowing money into such strategies. But in 2011, the index provider did unveil the S'P GSCI Dynamic Roll Index , which works to mitigate contango by owning contracts for a given commodity that create the least “negative roll yield.”
Contango occurs in the futures market when distant futures’ prices exceed the cost of futures for more immediate delivery, so that fund managers, when they maintain exposure as contracts expire, have to pay more for contracts they are rolling into than they receive for contracts they liquidate. Those price differences eat into returns, and significantly over time.
The poster child for successful contango-mitigating ETFs is the PowerShares DB Commodity Tracking Fund (DBC), which has $6.42 billion in assets. The United States Commodity Fund (USCI), a more recent entrant, now has $487 million in assets, according to data compiled by IndexUniverse.
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