JP Morgan unveils new multi-commodity index

Unlike existing passive benchmark indices that reference commodities, the index includes single commodity contracts with maturities as long as three years. The weighted average tenor of the index is eight months.

The index is made up of, and weighted according to, all outstanding eligible commodities in the market.

“We wanted to represent all investment opportunities available through commodity futures,” said John Normand, head of global currency strategy and cross-commodity research for JP Morgan in London. “We have applied the standard market capitalisation framework across commodity curves and replicated all liquid tenors in proportion to their outstandings. That’s quite different from the way traditional indexes approach commodity investing in that those products tend to focus their exposure in the front months, where liquidity had been concentrated when those products were launched over a decade ago."

To be eligible for the index, a single commodity must have a market capitalisation over $250 million. The commodity must also be sufficiently liquid, be traded in US dollars, have traded for at least a year and be listed on the US or UK exchanges.

The index rolls into eligible contracts every month, with an annual rebalancing that establishes the weights between the individual commodities. By including a wide array of commodities at weightings that closely reflect the overall market, the bank hopes to attract investors who have a bullish long-term view of the commodity market, with a reduced curve exposure as a result of a longer maturity profile.

"In the early nineties investors focused their interest at the front of the curve,” says Tim Owens, head of commodity solutions at JP Morgan in London. “However, some investors who had invested in traditional commodity indexes suffered losses, because the effect of being invested predominantly in the front end of the curve is that you are very exposed to the highly volatile roll costs of maintaining a commodity index exposure. Our index does not require the replacement of these futures as continuously and investors are therefore not exposed to the associated volatility."

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