A combination of various commodities ensures diversification. This index utilises the forward curve by purchasing the contract1 with the maximum backwardation2 or the minimum contango3. The index’s commodities are selected each month following a strict process, making it a highly dynamic index.
The IQAM Commodity Index chooses from a universe of 25 commodities in the energy, agriculture, precious metals and base metals categories. Each month, 14 of these commodities are selected and equal weighted. The IQAM Non-Food Commodity Index chooses from a universe of 15 commodities in the energy, precious metals and base metals categories. Each month, 10 of these commodities are selected and assigned predetermined weights between 5,5% and 14,5%. This ranking is guided by commodity sustainability. The highest ranked will be assigned with a weight of 14,5%, while the lowest ranked commodity will be assigned with 5,5% weight.
To achieve the optimum composition, the commodities are selected in a two-stage process:
- Stage 1: For each of the available commodities a backwardation score and a momentum4 score are calculated. Both scores will be combined and the 10 commodities with the highest combined score are selected.
- Stage 2: Positioning of the various commodities on the forward curve based on the strongest backwardation or the weakest contango.
The graph above shows the trend in the two indices.
Implementation in the Strategic Commodity Fund is based on a swap on the IQAM Commodity Index. Here you can find the IQAM Commodity Index Handbook
1 Minimum tradable unit
2 Gains from rolling over contracts, if the spot price is above the futures price
3 Losses from rolling over contracts, if the spot price is below the futures price
4 Momentum is a basic indicator that reflects the strength of a trend. The momentum is the difference between the current price and the price x days before.