Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 05 January 2017 at 11:31 GMT

Commodity funds and the annual rebalance — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • 2016 sees commodity sector return to profitability
  • Index-linked commodity investments see annual 'rebalancing'
  • Rebalancing transactions may prompt market movements

The annual January rebalancing of commodity funds is always well-anticipated, 
but it can still lead to market movements. Photo: iStock 

By Ole Hansen

Last year the commodity sector returned to profit for the first time since 2010. Positive returns were seen across most sectors apart from grains and livestock. 

Despite maintaining different investment approaches (see below), two of the world's most-tracked commodity indices managed more or less the same return at around 11.5% 

Total return 2016
What is a commodity index?

Before moving on, let us just have a look at what a commodity index actually is and how it works. A commodity index either invests in or tracks the performance of a group of commodities based on predefined rules. 

It is often the performance of these indices that is referred to in the media or when comparing commodity performance with other markets, such as stocks and bonds. 

Large investors often prefer a diversified approach, especially to commodities, given the high level of volatility that invariably goes with investing in individual commodities. Commodity index funds help investors to properly benchmark the performance and return of their investments. 

After all, a big swing in one individual component 
can have severe knock-on effects... Photo: iStock 

Due to the increased popularity of commodities, these funds have grown in recent years.

Two major indices

The two major indices, as mentioned above – the S&P GSCI index and the Bloomberg Commodity index – have become the industry-standard benchmarks for investors in commodities. 

These two indices have, according to latest data from Morgan Stanley, a large investor following that currently sits at around $115 billion ($55bn GSCI / $60bn BCOM). 

Investors either invest directly into the funds or through exchange-traded funds that track their performances. Furthermore, many local commodity fund offerings track one of the two commodity funds.

Different structures and strategy

The S&P GSCI, established in 1991, is an index calculated primarily on a world production-weighted basis. It comprises 24 physical commodities that are the subject of active, liquid, futures markets. 

The weight of each commodity in this index is determined by the average quantity of production and is designed to reflect the relative significance of each of the included commodities in the world economy. 

Due to this structure, the S&P GSCI is very heavily exposed towards the energy sector, with 56% of the index currently invested in products ranging from crude oil to natural gas.


The Bloomberg Commodity Index (BCOM), previously called the DJ-UBSCI was established in 1998 and has a more diversified approach. This index comprises 22 physical commodities, all represented by active futures markets. 

No single commodity can comprise less than 2% or more than 15% of the index and no group or sector can represent more than 33%. 

The weightings for each commodity included are calculated in accordance with rules designed to ensure that the relative proportion of each of the underlying individual commodities reflects its global economic significance and market liquidity. 

2017 allocation
Individual allocation

Different composition, different performance 

Investors looking for passively managed exposure to commodities should therefore be aware of these different allocation structures. The S&P GSCI offers a large exposure to energy while the BCOM offers a bigger exposure to metals, both industrial and precious. 

(Also note that BCOM has an 8% exposure to the very volatile natural gas contract where the notorious contango tends to create a challenge for those seeking a longer-term gains.)

There are of course numerous other commodity indices which also can be traded through ETFs, of which the best known are probably the Reuters-Jeffries CRB Index and the Rogers International Commodity index. 

Impacts of the January rebalancing

Index-linked commodity investments such as the ones that follow the major commodity indices mentioned go through a rebalancing period every year where the index weightings are adjusted. The reason for this process is to align and adjust existing positions according to the individual performances during the previous year. 

Generally, the exercise involves buying/increasing the exposure of commodities which suffered losses during the previous year at the expense of selling/reducing commodities experiencing gains. In addition, the overall target weight of an individual commodity or sector can also be adjusted, while old contracts can be removed or new added. 

The rebalancing for both commodity indices occurs in January during a five-day business period from January 9 to January 13. 

According to calculation carried out by Morgan Stanley, the contracts seeing a significant amount of selling next week will be Brent crude oil, natural gas and sugar. The contracts seeing the most demand will be corn, wheat, live cattle and gold.

It's your time to shine. Photo: iStock 

These transactions are well-flagged and known to the market in advance but may still create some movements depending on the available liquidity in the different contracts. 

How to gain access to commodities via ETFs

Below is a list of some of the major US listed ETFs offering access to commodity index (CI) funds. There currently exists more than 100 ETFs on various exchanges which has a broad-based commodity investment approach. 

To find others, please use the search function on your SaxoTraderGO platform.  

Commodity ETFs

— Edited by Michael McKenna

Ole Hansen is head of commodities strategy at Saxo Bank 


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail