Introduction to the S&P GSCI
The S&P GSCI is a composite index of commodities that measures the performance of the commodities market. It often serves as a benchmark for commodities investments. Investing in a GSCI fund provides a broadly diversified, unleveraged long-only position in commodity futures.
Initially known as the Goldman Sachs Commodity Index (GSCI), it was acquired by Standard & Poor’s in 2007. Despite this change in ownership, the S&P GSCI should not be confused with the similar Dow Jones Commodity Index (DJCI).
Key Highlights
- The S&P GSCI is a benchmark commodities index that tracks the performance of the global commodities market.
- Comprising 24 exchange-traded futures contracts, it spans physical commodities across five sectors.
- Designed to be investable, there are ETF products available that track its performance.
- The S&P GSCI automatically rolls futures contracts, an aspect that may not always be an optimal investment strategy.
How the S&P GSCI Functions
Weighted by world production, the S&P GSCI consists of physical commodities that have active, liquid futures markets. There is no limit on the number of included commodities; any contract satisfying the eligibility criteria is incorporated. This index aims to reflect the significance of its commodities to the global economy while ensuring adequate tradability by selecting contracts with sufficient liquidity.
The methodology behind the S&P GSCI remains unchanged since Standard & Poor’s took over. The index is made up of 24 exchange-traded futures contracts covering five sectors: energy, industrial metals, precious metals, agriculture, and livestock. Though the sector mix remains consistent, the weighting of components changes annually.
Investing in the S&P GSCI
Designed with investability in mind, the S&P GSCI is often used in ETF products to track its performance. It captures the global inflation of core commodities, making it useful for creating funds with low correlations to traditional asset classes. For example, the iShares S&P GSCI Commodity Index ETF (GSG) is one product that tracks the index.
Components of the S&P GSCI
Components of the index are chosen based on liquidity measures and are weighted in relation to their global production levels, thus serving as valuable indicators in economic assessments and commodity market benchmarks. Below are reference weightings for the S&P GSCI’s components based on 2021 data:
| GSCI Component Weights | 2021 Relative Dollar Weights (Nearest %) | Included Commodities |
|---|---|---|
| Energy | 54% | Crude oil, Refined oil products, Natural gas |
| Grains | 15% | Wheat, Corn, Soybeans |
| Livestock | 8% | Hogs, Cattle |
| “Soft” Agriculture | 4% | Coffee, Sugar, Cocoa, Cotton |
| Industrial Metals | 12% | Aluminum, Copper, Zinc, Nickel, Lead |
| Precious Metals | 7% | Gold, Silver, Platinum |
Energy is the largest sector, holding 54% of the index, followed by agriculture and metals making up 27% and 19%, respectively.
Drawbacks of the S&P GSCI Index
The S&P GSCI’s automatic futures contract rolling strategy may not always be optimal. Futures contracts are impacted by contango and backwardation, which can cause different performance outcomes compared to actual commodities. Additionally, professional traders might exploit these conditions to profit from simpler automatic rolling strategies. Nonetheless, these are often theoretical criticisms.
The component mix of the S&P GSCI is reevaluated and rebalanced annually, ensuring up-to-date representation of the global commodity market.
Alternative Commodity Indexes
Other significant commodity indexes include the Credit Suisse Commodity Benchmark Index, the Rogers International Commodities Index, and the Bloomberg Commodity Total Return Index. The DJCI, another weighted index, tracks 28 different commodity futures contracts, spanning metals, agricultural products, and energy commodities such as oil and gas.
Understanding the weighting and rebalancing processes is essential, as these affect the performance of tracking products over time.
Related Terms: commodity index, futures market, economic indicator, asset classes, ETF, contango, backwardation
References
- S&P Dow Jones Indices. “S&P GSCI Methodology”.
