Commodity ETFs: Know Your Indices

LOW COST FUNDS: Investors should be aware that rebalancing an index can impact the performance of one index versus another

Kenneth Lamont 22 August, 2014 | 11:40AM

In May, BNP Paribas changed the benchmark of its broad-basket commodity ETF, namely the S&P GSCI Capped Component 35/20 THEAM Easy ETF, for the sole purpose of complying with ESMA diversification guidelines. 

The replacement index applies caps on a ‘component’ rather than a ‘commodity’ level, effectively reducing the index’s exposure to the energy sector.

This occurs because an index component such as oil, may include more than one, highly-correlated individual commodity such as Brent Crude, WTI Crude or Gasoil. Therefore a cap at component level restricts the combined weight, rather than individual weights, of commodities. Although this difference may appear subtle, the impact on returns to investors is anything but, as you can see in Chart 1.

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About Author

Kenneth Lamont  is a passive funds research analyst for Morningstar Europe.

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