HardAssetsInvestor

Written by Amine Bouchentouf  |

April 24, 2012

The Commodity Investor: Index Funds DBC, GSS & RJI Offer Easy Access To Commodity Gains

Details

Explosive growth, easy access to markets have made commodity indexes more than a benchmark of performance.

Investing in commodity index funds has become a very popular way for average investors to get exposure to the broader commodity markets. Index funds are now one of the main vehicles to invest in commodities, and this wasn’t the case 10 years ago, not even five years ago. So why have index funds grown in popularity, and do they really offer the best way for investors to get exposure to commodities?

The first commodity indexes were developed by banks and business groups such as Goldman Sachs, UBS, Standard & Poor’s and Dow Jones to track the performance of a basket of critical commodities in the late 1970s and early 1980s. During this period, these indexes were used primarily as performance benchmarks and were rarely used as investable instruments. Fast-forward to today and you quickly see how rapidly this once-quiet segment of the market has exploded in size, volume, visibility and tradability.

Today, there is more than $500 billion of assets tracking the broad commodity index market and that number is growing yearly. That’s a real asset explosion, especially considering the industry only had $5 billion in assets in the late 1990s, according to Barclays Capital Research. Also, the number of commodity indexes has exploded and, just like any expanding industry, the market experienced a consolidation phase. For example, while the original Goldman Sachs Commodity Index (GSCI) still exists, it was gobbled up by Standard & Poor’s.

The rise of the commodity index can be attributed to several different factors. First, the commodities industry itself experienced explosive growth over the last decade, driven by surging demand for all sorts of key resources such as oil, natural gas, corn and wheat. This led to increasing interest from investors and traders. Previously, it was very difficult to trade commodities if you weren’t a licensed professional operating on the floors of the mercantile exchanges in New York or Chicago.

Secondly, with the advent of the commodity index, any investor can get quick and easy access to the broad commodity markets without opening a futures account and without leveraging their balance sheet 10-to-1 or 25-to-1.