From time to time here at Hard Assets Investor, we like to take a step back and look at the big picture. For us that means the broad commodities indexes. We recently did a rundown on the “big three” and how they were impacted differently by the vagaries of contango and backwardation in the futures market (the point being that GSCI-based funds were gaining the benefits of backwardation in oil, whereas everyone else was getting slammed by persistent contango).
Since then (just a month ago), we have a new player on the block: the Elements Exchange-Traded Notes [ETNs], specifically, the RJI note, which is linked to the Rogers International Commodities Index. This creates enough mud in the water that it’s worth a refresher.
First off, your options. Today you can track four different indexes in five different exchange-traded vehicles:
- The Goldman Sachs Commodity Index is tracked by both the iShares ETF (ticker: GSG) and an iPath ETN (ticker: GSP).
- The Dow Jones – AIG Commodity Index is tracked by the iPath ETN (ticker: DJP)
- The Deutsche Bank Commodities Index is tracked by a PowerShares ETF (ticker: DBC)
- The Rogers International commodity Index is tracked by the new Elements ETN (ticker: RJI).
5 vehicles, one market. And some pretty dramatic differences.
GSCI (GSG or GSP)
GSCI is the most concentrated index of all. Currently 75% of the index is in energy, with most of that in direct exposure to crude oil. The dominance of crude is so dramatic that the other exposure serves nearly as afterthought diversification. In recent months, the inversion of oil futures back to backwardation has made this an excellent bet – roll yield is once again a GSCI investor’s friend.
Deutsche Bank Commodity Index (DBC)
One step further from energy dominance is the Deutsche Bank Commodity Index. The DB index is currently “only” 55% in energy. But DBC is notable for its lack of internal diversification – its exposure is made up entirely of six commodities: Crude, Heating Oil, Aluminum, Corn, Wheat and Gold. While this does offer basic exposure to the market, it concentrates its internal bets – a crazy run-up in Soybeans isn’t going to show up, but then again, neither would a collapse of the copper market. It’s a classic situation with minimally diversified portfolios.
DJ-AIG Commodity Index (DJP)
One step further from energy is the Dow Jones-AIG Commodity Index, which you access through the iPath DJP. DJ-AIG and GSCI share an extremely similar list of portfolio holdings, with a broad range of contracts in each sector. Where they differ is in how they allocate their portfolios to different sectors. GSCI does its allocations based on the economic impact from production (oil is big, so it gets big representation in the index). DJ-AIG takes liquidity (trading volume) into account, which skews it away from the big and towards the active. DJ-AIG also explicitly rules out any individual contract from being more than 15% of the index, in stark contrast to the GSCI, where 37% of the portfolio is now in the WTI Crude Oil contract. In a sense, the DJ-AIG is indexing the commodity market, not the commodity economy. This kicks up the exposure in precious metals and agriculture dramatically – there’s a lot of Corn and Gold floating around the (virtual) pits these days.
Rogers International (RJP)
Last but not least is Mr. Rogers’ own index, the Rogers International Commodity Index. The RICI tracks by far the largest pool of securities, including everything from Soybean Oil to Greasy Wool to Tin. Allocations are made based on an assessment of worldwide consumption, regardless of the value of production. This results in an overall allocation not dissimilar to the DJ-AIG, but with more concentration (the WTI Crude Contract is 21%) and more left-field, deep-in-the-market plays (like Wool).
So with this new kid on the block, where’s the smart money going? Since the RICI-based note (RJI) is too new to track, we substituted the index performance and then compared returns for all the available funds. The gives the RICI a slight edge in our chart below, because it doesn’t include expenses.
So who won? The RICI. By a smidgen.
Since November 1, 2006, the RICI had a one-year return of just under 25%, mirroring the performance of both the DBC and GSG ETFs (Deutsche Bank and GSCI respectively). While they diverged in the summer (mostly due to the craziness in Oil futures), they’ve since rejoined, and even the laggard (DBC) has returned over 23%. The real monkey in the horse race has been the Dow Jones – AIG index (represented by the DJP ETF). DJP’s comparative underweighting in energy caused it to miss out on much of crude oil’s squirrel-chasingly crazy run-up since August, and performance has suffered -- proof once again that it pays to choose your index wisely.
Confused? You shouldn’t be. For all the acronym soup, the choices aren’t that complex. It’s all about watching your weight.