COMMODITY INDICES
and roll return basis. I 2007, the DBLCI-Mean Reversion has performed
strongly but the sudden move from contango to backwardation in the
Figure 3: Sector Weights of Major Commodity Indices
crude oil curve has led to the under-performance of the DBLCI-OY.
Investors therefore need to be acutely aware of the characteristics
that differentiate the numerous commodity index products in the
marketplace so as to be familiar how changing market conditions
can affect index performance. The next section outlines the sources
of returns of a commodity index and the importance of inventory in
determining the shape of the forward curve as well as the level of
volatility across the commodity complex.
Section II: The Sources of Returns Within a Commodity Index
The returns generated by equity and bonds come in the form of
dividends and coupons. However, for commodities, returns come
from three main sources:
Source: DB Global Markets Research, Bloomberg; Base weights apply except for DJAIG
and S&P GSCI weights, which are as of July 9, 2007.
Formula 1:
Total Returns = Spot Return + Roll Return + Collateral Yield
The Composition of Returns
Since 1972, the forward curves for corn
The spot return is simply a result of commodities becoming more, and wheat have been in contango
or less, expensive over time. In terms of the roll yield, where the around 75% of the time. Meanwhile,
price of a commodity is higher for shorter delivery dates an investor from the inception of the energy futures
earns a positive roll yield by buying, waiting for the price to appre- markets in the 1980s to the end of
ciate as the delivery date approaches, then selling and using the 2004, the WTI forward curve had been
proceeds to reinvest at a cheaper price at a future date. Such a in backwardation just over 60% of the
strategy is highlighted in Figure 4. The final source of return is the time. The tendency for energy curves to
collateral yield which is the return accruing to any margin held be in backwardation and non-energy
against a futures position and which we proxy with the US T-bill curves to be in contango helps to
rate. Excess returns are simply the sum of spot and roll returns. explain why historically the main source
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