Introduction
Given the current uncertainty in the equities and bonds markets, market participants may be considering how to protect their investments and enhance their strategies. In our previous paper, we spoke to the diversification characteristics of commodities compared with stocks and bonds, and how the S&P GSCI has reflected this. In this paper, we reintroduce another important commodities index: the Dow Jones Commodity Index (DJCI). With 26 years of history and a more balanced approach to commodity investing, the DJCI has historically offered both increased diversification and superior performance as compared to other indices, including the S&P GSCI and the Bloomberg Commodity Index (BCOM).
Launched in 2014, the DJCI is a broad-based commodity index. As of its January 2025 reconstitution, it holds 29 commodity futures contracts, representing global commodities across three sectors: agriculture and livestock; energy; and precious and industrial metals. Like the S&P GSCI and BCOM, the DJCI holds the front-month futures contract, rolls monthly and rebalances annually in January.
Unlike the S&P GSCI and BCOM, the DJCI is liquidity weighted and reweights monthly. Additionally, the DJCI equally weights between commodity sectors and caps the maximum weight of any commodity component at 32%, with any remaining commodity component capped at 17%. These weighting constraints are applied iteratively until all requirements are met.
Part I: Methodology and Performance
In this section, we will dive into these unique methodology components: specifically, (1) the emphasis on liquidity; (2) equal weighting; and (3) monthly rebalancing. We explore the historical characteristics that each index has offered in terms of performance enhancement and volatility reduction across various time horizons.
First, by emphasizing liquidity, rather than world production, the DJCI offers a unique measurement of the commodities market. Liquidity, which is proxied by the total dollar value traded of all outstanding contracts, determines the overall weight, and therefore the importance of individual constituent commodities within the index.