In calculating returns, the GSCI, RICI and the DJ-AIG indices use an arithmetic weighted average of the underlying commodities to represent the index. The CRB Index utilizes both geometric and arithmetic averages of the prices of the underlying commodities to construct returns. Geometric averaging creates lower overall volatility of returns than arithmetic averaging and, according to the CRB, geometric averaging “has the statistically attractive property that successive percentage changes in a component’s price do not alter that component’s relative weight in the index.”
Arithmetic averaging, on the other hand, causes the relative weight of a component to increase (or decrease) as that component appreciates (or depreciates) in value. The method used by the CRB allows the index to maintain equal weight in the 17 individual components so that no single commodity has undue impact on the index. The index is also less subject to the fluctuations associated with temporary supply and demand imbalances in any one commodity.
Compared to other long-only commodity indices, the DJ-AIG offers a more balanced mix of commodities and is not as impacted by the performance of the energy sector as the GSCI. In terms of liquidity, the GSCI and the DJ-AIG have several products that seek to replicate the returns of the indices, which makes them more accessible to institutional investors. These indices are also the most widely followed and considered proxies for the commodity market. In analyzing performance, the CRB Index has trailed the other indices over time by a significant margin. This is due in part to its larger weighting in “softs” and lower weighting in energy related commodities compared to the other indices.
Arithmetic averaging, on the other hand, causes the relative weight of a component to increase (or decrease) as that component appreciates (or depreciates) in value. The method used by the CRB allows the index to maintain equal weight in the 17 individual components so that no single commodity has undue impact on the index. The index is also less subject to the fluctuations associated with temporary supply and demand imbalances in any one commodity.
Compared to other long-only commodity indices, the DJ-AIG offers a more balanced mix of commodities and is not as impacted by the performance of the energy sector as the GSCI. In terms of liquidity, the GSCI and the DJ-AIG have several products that seek to replicate the returns of the indices, which makes them more accessible to institutional investors. These indices are also the most widely followed and considered proxies for the commodity market. In analyzing performance, the CRB Index has trailed the other indices over time by a significant margin. This is due in part to its larger weighting in “softs” and lower weighting in energy related commodities compared to the other indices.
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