EXECUTIVE SUMMARY
S&P Dow Jones Indices has been providing index-based performance measures of real assets since 2007. Whether you prefer equity-based exposure to companies that produce commodities, or more direct exposure through futures contracts, S&P Dow Jones Indices offers tools for better understanding and accessing commodities market exposures. This paper focuses on understanding commodities as an asset class as well as the S&P GSCI, a preeminent measure of a basket of commonly traded commodities futures contracts.
WHAT ARE COMMODITIES?
Commodities such as gold and oil frequently capture media and investor attention. So what are commodities, and why are some financial advisors considering allocating portions of their clients’ portfolios to commodities and other real assets?
Commodities are:
- Basic, standardized real assets that are in demand and can be supplied without substantial product differentiation across markets;
- Fungible, or in other words, considered equivalent for trading purposes despite coming from different producers; and
- In the case of physical goods traded as commodities, widely used as production inputs.
Because commodities are fungible and traded on exchanges globally, commodity prices are driven by global supply and demand. These performance characteristics set commodities apart from equity or fixed income investments, whose returns are linked to additional market fundamentals.
Some commodities, such as precious metals, are held for their store of value characteristics. However, since the storage costs of many commodities are prohibitive, some investors may use futures contracts to gain commodities exposure and avoid physical delivery or storage costs. Still, the question remains: is it better to physically hold a commodity like gold, or be diversified across a basket of commodities futures?
