Historically, commodities have had low correlations to stocks and bonds since the sources of return are inherently different. Because commodities are necessary, often-used staple goods, they can also provide diversification during economic crises.
Commodity indices tend to have a positive correlation to inflation because they reflect our changing expectations of future prices. Historically, one dollar of investment in broad-based commodity indices has provided more than one dollar of inflation protection, since food and energy have more weight in the index than in the CPI.
The weight of each commodity in the S&P GSCI® is based on the volume of futures contracts traded on that commodity, allowing the index to be investable. As a result, the index has relatively higher weights in crude oil, natural gas and heating oil – some of the most heavily traded commodities in the world. The Dow Jones Commodity Index employs a simple, straightforward, equal-weighted approach, so that one-third of the index is devoted to agriculture and livestock, one-third to energy and one-third to metals.
S&P GSCI and Dow Jones Commodity Index can be considered a true reflection of commodity beta. Just as the S&P 500’s® market capitalization weighting scheme mirrors the stock market, S&P GSCI® uses a production weighting scheme to tap into how the world views the general commodity landscape. The Dow Jones Commodity Index was designed with equally weighted sectors and liquidity-weighted commodities to facilitate the index’s use as a well-diversified core beta index and as a building block for modified indices. Sources of return may be captured with modified indices like the DJCI and S&P WCI.