What Is the Bloomberg Commodity Index?
The Bloomberg Commodity Index (BCOM) is a broadly diversified benchmark designed to track the performance of futures contracts on physical commodities traded in the financial markets. It falls under the broader category of financial benchmarks, providing a standardized measure for the global commodity market. The BCOM aims to minimize concentration in any single commodity or sector, making it a tool for investors seeking diversification beyond traditional asset classes like stocks and bonds. It currently includes a basket of 23 commodity futures across six main sectors, with explicit rules to ensure balanced representation.
History and Origin
The Bloomberg Commodity Index has evolved through several iterations since its inception. It was originally launched in 1998 as the Dow Jones-AIG Commodity Index (DJ-AIGCI), created by Dow Jones & Company. The index was designed to introduce a focus on market liquidity and incorporate a capping mechanism to prevent excessive concentration in individual commodities or sectors38. Following the 2008 financial crisis, American International Group (AIG) divested its stake, leading to UBS acquiring the rights to the index in May 2009. Consequently, the index was renamed the Dow Jones-UBS Commodity Index (DJ-UBSCI). On July 1, 2014, Bloomberg Index Services Limited took over the administration of the index, rebranding it under its current name, the Bloomberg Commodity Index (BCOM)37. This transition marked a significant moment in its history, cementing its position as a major commodity benchmark administered by a leading financial data and analytics provider.
Key Takeaways
- The Bloomberg Commodity Index (BCOM) is a widely recognized benchmark for the performance of diversified physical commodities.
- It tracks prices of futures contracts across various sectors, including energy, metals, and agriculture.
- BCOM employs a weighting methodology that considers both commodity production and market liquidity, with caps to ensure diversification.
- The index regularly undergoes a "rolling" process, replacing expiring futures contracts with new ones to avoid physical delivery36.
- Investors can gain exposure to the BCOM through various investment products, such as Exchange-Traded Funds (ETFs) or other structured products.
Formula and Calculation
The calculation of the Bloomberg Commodity Index involves a methodology that aims to reflect the global economic significance and market liquidity of its constituent commodities. The index is composed of futures contracts on physical commodities, and its weighting for each commodity is determined by a 2:1 ratio of liquidity to production data35.
The Commodity Liquidity Percentage (CLP) for each futures contract is derived from a five-year average of trading volume and the historic U.S. dollar value of the contract34. The production data reflects the global supply of each commodity. These percentages are then used to determine the Commodity Index Multipliers (CIMs) annually.
The daily index level is a sum of the values of its constituent commodities. Each commodity's value within the index is determined by its respective futures contract price multiplied by its Commodity Index Multiplier.
A critical aspect of the BCOM calculation is the "rolling" process33. Since futures contracts have finite expiration dates, the index must periodically sell expiring contracts and purchase new ones with later expiration dates to maintain continuous exposure to the commodity market. This roll process is systematically implemented over a five-day period each month31, 32. The index also undergoes annual rebalancing and reweighting to ensure that diversity and the target weight constraints are maintained over time.
Interpreting the Bloomberg Commodity Index
The Bloomberg Commodity Index (BCOM) provides a snapshot of the broad commodity market's health and direction. Investors and analysts use the BCOM to gauge sentiment across various sectors, from energy to agriculture and metals. A rising BCOM typically indicates increasing commodity prices, which can suggest growing global demand, inflationary pressures, or supply constraints30. Conversely, a falling BCOM may signal slowing economic activity or abundant supply.
When interpreting the BCOM, it is important to understand that it tracks futures prices rather than immediate spot prices of physical commodities29. The relationship between futures and spot prices, influenced by factors like storage costs and convenience yield, can impact the index's performance. The "rolling" mechanism, inherent to futures-based indices, can also introduce roll yield effects (contango or backwardation), which affect overall returns and must be considered when evaluating the index's performance28. Furthermore, the BCOM's design with its diversification caps helps provide a more balanced view of the overall commodity market, reducing the impact of extreme price movements in a single commodity.
Hypothetical Example
Imagine an investor, Sarah, is looking to understand the performance of raw materials over a specific period. She looks at the Bloomberg Commodity Index (BCOM).
On January 1st, the BCOM stands at 100 points. Over the next six months, global demand for industrial metals and energy increases, while agricultural output remains stable. As a result, the prices of the futures contracts for copper, crude oil, and natural gas, which are significant components of the BCOM, rise steadily.
By July 1st, after factoring in the daily movements of its 23 underlying commodity futures and the monthly "rolling" of contracts, the Bloomberg Commodity Index has increased to 105 points. This 5% rise indicates that, on average, the diversified basket of commodities tracked by the index has appreciated. Sarah can interpret this to mean that the segment of her investment portfolio allocated to broad commodities, if it tracks the BCOM, would have seen a positive return during this period, contributing to her overall portfolio performance.
Practical Applications
The Bloomberg Commodity Index (BCOM) serves as a vital tool for various participants in the financial world. For investors, it functions as a benchmark to assess the performance of the broad commodity market and provides a means to gain exposure to this asset class27. Financial institutions often create investment products, such as Exchange-Traded Funds (ETFs), that aim to replicate the performance of the BCOM, allowing individual and institutional investors to invest in a diversified basket of commodities without needing to trade individual futures contracts25, 26.
Fund managers utilize the BCOM for portfolio management strategies, including asset allocation and risk management. By including commodities, often considered a hedge against inflation and a source of diversification due to their low correlation with traditional equities and bonds, investors can potentially enhance portfolio resilience23, 24. Furthermore, the International Monetary Fund (IMF) regularly tracks and reports on primary commodity prices, providing broader economic insights into global supply and demand dynamics, which can indirectly influence the BCOM's movements22.
Limitations and Criticisms
Despite its widespread use, the Bloomberg Commodity Index, like all financial benchmarks, has limitations and faces criticisms. One common critique revolves around the nature of investing in commodity futures indices versus direct physical commodity exposure. Unlike owning physical commodities, a futures-based index like the BCOM is subject to "roll yield," which can negatively impact returns, particularly in periods of contango (where longer-dated futures prices are higher than near-term prices)21. This can lead to the index underperforming the spot price performance of underlying commodities over time20.
Another point of contention has been the weighting methodology. While the BCOM aims for diversification through its liquidity and production weighting and capping mechanisms, some critics argue that traditional commodity indices, including BCOM, may still exhibit significant concentration in certain sectors, particularly energy18, 19. This concentration can expose investors to heightened volatility and idiosyncratic risks associated with those sectors16, 17. Research Affiliates, for instance, has highlighted that traditional commodity indices can suffer from a lack of diversification and exposures that do not always adjust optimally with market conditions, impacting their performance14, 15.
Bloomberg Commodity Index vs. S&P GSCI
The Bloomberg Commodity Index (BCOM) and the S&P GSCI (formerly the Goldman Sachs Commodity Index) are two of the most prominent benchmarks in the commodity market, yet they differ significantly in their construction and resulting exposures. The primary distinction lies in their weighting methodologies.
The BCOM employs a weighting scheme that combines global production data with market liquidity, applying caps on individual commodities (15%) and sectors (33%) to promote broader diversification13. This approach leads to a more balanced distribution across commodity groups, with energy typically comprising around 30% of the index, followed by grains, precious metals, and industrial metals12.
In contrast, the S&P GSCI is primarily weighted by global production, which often results in a much higher concentration in the energy sector, sometimes exceeding 50% of the index10, 11. This higher energy exposure can make the S&P GSCI more volatile and sensitive to oil price fluctuations compared to the BCOM9. While both indices include a similar number of commodities, the S&P GSCI's production-only weighting emphasizes the most heavily produced commodities, whereas the BCOM's liquidity component and capping rules lead to a more even distribution of weights across its constituents7, 8. Investors often choose between the two based on their desired level of energy exposure and overall diversification within their commodity allocation.
FAQs
What types of commodities are included in the Bloomberg Commodity Index?
The Bloomberg Commodity Index (BCOM) includes a diversified range of commodity futures from six sectors: energy, grains, industrial metals, precious metals, softs (e.g., sugar, coffee, cotton), and livestock (e.g., live cattle, lean hogs). It currently tracks 23 individual commodity futures contracts.
How often is the Bloomberg Commodity Index rebalanced?
The Bloomberg Commodity Index is reweighted and rebalanced annually6. This annual rebalancing process ensures that the index maintains its target diversification and reflects changes in global production and market liquidity.
Can investors directly invest in the Bloomberg Commodity Index?
No, investors cannot directly invest in an index itself. However, they can gain exposure to the Bloomberg Commodity Index through various financial products, such as Exchange-Traded Funds (ETFs) or other derivatives, that are designed to track the performance of the BCOM4, 5.
What is the purpose of the "rolling" process in the BCOM?
The "rolling" process is essential because the Bloomberg Commodity Index tracks futures contracts, which have finite expiration dates2, 3. To maintain continuous exposure to the underlying commodities and avoid physical delivery, the index must periodically sell futures contracts that are nearing expiration and buy new contracts with later expiration dates1. This systematic process ensures the index remains investable over time.