HardAssetsInvestor

Written by Drew Voros  |

August 29, 2011

McGlone: S&P GSCI Index Purest Measure Of Commodity Markets

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S&P’s senior director of commodities explains the method behind most widely tracked and watched commodity index.

All commodity indexes are not the same. But what are the differences between the S&P Goldman Sachs Commodity Index, the Reuters/Jefferies Commodity Index, the Dow Jones – UBS Commodity Index, the Rogers International Commodity Index, the UBS – Bloomberg CMCI Index and the Deutsche Bank Liquid Commodity Index?

Today we talk to Michael McGlone, senior director of commodities for Standard & Poor’s, which is responsible for 9-year-old the S&P Goldman Sachs Commodity Index.

Hard Assets Investor: What’s the main difference between the S&P GSCI Index and other major commodity indexes?

Michael McGlone: The S&P GSCI Index was really the first truly investable index. Goldman Sachs created it in 1991. S&P purchased it in 2007. It’s generally considered the most widely tracked and the most widely watched index. It has the most significant amount of tracking input and is considered, essentially, the beta for the index. And partly I say that because it’s really the only major [commodity] index that is truly world-production weight, which is synonymous with market-cap weighting and the S&P 500. So it’s intended to be a pure, investable measure of the world’s commodity markets.

In addition, it’s also the only [major commodity index] that’s from a complete independent index provider. It has the largest “toolbox.” It has the largest variety of related indices. The S&P GSCI is one standard. But it has a family of indices that is vast. It’s by far the broadest product line and the most widely tracked.

HAI: What is the methodology behind the index’s weighting?

McGlone: The index is world-production weighted, as I had mentioned earlier, which is somewhat synonymous with market-cap weighting like the S&P 500. It’s why crude oil has a higher weight in the GSCI than corn — because crude oil is the world’s most significantly produced commodity, and thus, it should have a more substantial impact when you're measuring commodities than corn does.

A good example is if crude oil goes up a lot in a very short amount of time, it’ll have a much greater impact in the global economy than corn does. That’s the basis behind the world-production weighted; it’s the most defensible. With that in mind, energy is the most significantly produced commodity or sector of commodities, of which petroleum is the main one. And so the GSCI has a high weight in petroleum. Also, in commodity futures, petroleum is the most significantly traded, has the most transparency and thus it gives the S&P GSCI the most liquidity.

HAI: What is the percentage of oil and energy in the index?

McGlone: Energy is currently about 70 percent, but it fluctuates with prices and world production.

HAI: How much does the weighting rely on rising prices?

McGlone: It’s subject to rise and changing prices every single day. A good example is Brent crude oil vs. WTI [West Texas Intermediate]. The weighting of Brent over the last few years has increased in the index because of two things: the relative price of Brent has increased, and also because the trading volume, the liquidity, the amount of total dollars of value traded — as we call it in Brent — has increased relative to some of the other petroleum products like crude oil. So price is the significant part. But also, world production is a factor, too.