Weighting schemes can be essential to meeting portfolio goals across all asset classes, and commodities are no exception. Our two flagship commodity indices, the S&P GSCI® and the Dow Jones Commodity Index (DJCI), employ similar index construction methodologies, with weighting as the main difference between them.
2 Indices, 2 Weighting Schemes
The DJCI is an equally weighted index designed to include diversification and liquidity as intrinsic characteristics. Each commodity is liquidity weighted by a five-year average of its total dollar value traded. To apply caps for further diversification, the commodities in the index are grouped into components according to their physical similarities and correlations. The caps are applied so that no more than one component is greater than
32% and no subsequent component is greater than 17%. Lastly, the sectors are limited
to 33% weight in the index.
The S&P GSCI, on the other hand, is a world production weighted index. This index is
designed to reflect the relative significance of its constituents to the world economy, while preserving its tradability by limiting eligible contracts to those with adequate liquidity. With respect to each designated contract, a contract production weight (CPW) is calculated based on world production and trading volume. Calculating a designated contract’s CPW involves the following four-step process:
- Determination of the world production quantity (WPQ) of each S&P GSCI
- Determination of the world production average (WPA) of each S&P GSCI
commodity over the WPQ period;
- Calculation of the CPW based on the contract’s percentage of the relevant total
quantity traded (TQT); and
- Certain adjustments to the CPWs.
The resulting index compositions differ dramatically. Energy is weighted higher in the
S&P GSCI at 72.1% vs. 33.8% in the DJCI. In addition, metals has a relatively low
weight in the S&P GSCI at 9.6%, compared with 35.5% in the DJCI, while agriculture and livestock hold 18.2% in the S&P GSCI vs. 30.7% in the DJCI (see Exhibit 1).