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S&P Dow Jones Indices has expanded its S&P GSCI family over the past couple of weeks with the launch of two new indices. The flagship S&P GSCI is one of the most widely recognised commodity benchmarks.
The first of the new indices, the S&P GSCI Dynamic Roll Capped Component 35/20, reflects the total return available through an unleveraged investment in the specific commodities of the S&P GSCI Dynamic Roll while employing the S&P Capped Component 35/20 methodology.
The capped component methodology ensures that the index adheres to ESMA guidelines on UCITS issues, thus making it an appropriate underlying benchmark for exchange-traded funds (ETFs).
The rules are such that only one commodity component can reach a maximum weight of 35% and that any excess weight is distributed proportionately among the remaining components, providing that no remaining component’s weight exceeds 20%.
The index is essentially an updated UCITS-compliant version of the existing S&P GSCI Dynamic Roll Capped Commodity 35/20 index, underlying to the London-listed iShares S&P GSCI Dynamic Roll Commodity Swap ETF (SDYC). The difference between these indices is subtle. The new capped component index narrows the 24 commodities in the existing capped commodity index to 18 components. Petroleum, wheat and cattle are the only components that include more than one commodity.
The index maintains the dynamic roll method of the parent S&P GSCI Dynamic Roll, which is designed to meet the demands of investors seeking to alleviate the negative impacts of contango and turnover to potentially limit volatility exposure to the commodity market.
Jodie Gunzberg, Vice President at S&P Dow Jones Indices, said: “The S&P GSCI Dynamic Roll Capped Component 35/20 uses a flexible monthly futures contract rolling strategy in order to determine the new futures contract months for the underlying commodities. While the S&P GSCI roll schedule is limited to the most liquid nearby contract months, the S&P GSCI Dynamic Roll Capped Component 35/20 matrix uses a systematic methodology to search for the optimal contract months along the curve, choosing from a set of the most liquid for a given commodity.”
S&P Dow Jones’s second new index in this space, the S&P GSCI Roll Weight Select, aims to reduce the negative impact of contango by modifying the weights of the commodities according to the relative change in the realised roll yield for each commodity in the index. The index is designed to maintain maximum liquidity by including only the most liquid front month contracts and only the 14 most liquid commodities representing each sector.
The change in realised roll yield is a new index measure that is used to weight the commodities. For each commodity, the measure itself is the difference of monthly returns (between the excess return and price return) of the current month single commodity index subtracted from the difference of monthly returns (between the excess return and price return) of the one month forward for each single commodity index.
According to Gunzberg: “The S&P GSCI Roll Weight Select is designed to preserve beta while maintaining liquidity. The index uses an innovative technique to measure the gradient of a single commodity index in order to weight the commodities to reflect the shape of a curve.”