About DJ-UBSCI

The DJ-UBSCI is designed to provide:

• Weightings that reflect economic significance
• Diversification
• Continuity
• Liquidity

To determine its component weightings, the DJ-UBSCI relies primarily on liquidity data, or the relative amount of trading activity of a particular commodity. Liquidity is an important indicator of the value placed on a commodity by financial and physical market participants. The index also relies to a lesser extent on dollar-adjusted production data. The index thus relies on data that is endogenous to the futures markets (liquidity) and exogenous to the futures markets (production) in determining relative weightings. All data used in both the liquidity and production calculations is averaged over a five-year period.

The component weightings are also determined by several rules designed to insure diversified commodity exposure. Disproportionate weighting of any particular commodity or sector may increase volatility and negate the concept of a broad-based commodity index, unduly subjecting the investor to micro-economic shocks in one commodity or sector. To help insure diversified commodity exposure, the DJ-UBSCI relies on several diversification rules. Among these rules are the following:

As of the annual reweightings of the components

* No related group of commodities (e.g., energy, precious metals, livestock and grains) may constitute more than 33% of the index .

* No single commodity may constitute less than 2% or more than 15% of the index.

The Index Supervisory Committee meets annually to determine the composition of the index in accordance with the rules established in the DJ-UBSCI Handbook. The new target weights for the commodity components were determined and approved by the Index Supervisory Committee in August 2008 with changes in index composition effective January 2009.

 

 

 

 

Actual weightings may vary over the course of the year due to market price fluctuations.

A commodity index should fairly represent the importance of a diversified group of commodities to the world economy. To that end, the DJ-UBSCI relies primarily on liquidity data, along with dollar-adjusted production data in determining the relative quantities of included commodities.

Liquidity, or the relative amount of trading activity centered on a particular commodity, is an important indicator of the value placed on that commodity by financial and physical market participants. Liquidity provides a window on the commercial significance of a commodity. The DJ-UBSCI relies on data that is both exogenous to the futures markets (production) and endogenous to those markets (liquidity) in determining relative weightings.

Production data, although a useful measure of economic importance, may underestimate the economic significance of storable commodities (e.g., gold) at the expense of relatively non-storable commodities (e.g., live cattle). Production data alone also may underestimate the investment value that financial market participants place on certain commodities.

Gold clearly illustrates the potential shortcomings of exclusive reliance on production data and the greater balance provided by reliance on liquidity data. Since time immemorial, gold has played a unique role in the world economy, which is not effectively captured by current production data. For example, although only 2,430 metric tons of gold were produced in 2004, approximately 31,400 metric tons were held as official government reserves. Of the approximately 149,000 tons of gold mined since the dawn of recorded history, approximately 85%, 127,000 metric tons, is still held by central banks and non-governmental entities in bullion, coin, and jewelry form.

Based on this data, a production-based ranking of commodities would contain a small amount of gold (2.5%), and large amounts of non-storable commodities, such as live cattle (11%). A doubling of the price of gold may be a more significant global economic event than a 25% increase in cattle prices, yet the two events would have a similar impact on a production-weighted index. Primary reliance on liquidity data as a weighting measure reduces this type of potential distortion.

The DJ-UBSCI is designed to provide diversified exposure to commodities as an asset class. Disproportionate weighting of any particular commodity or sector may increase volatility and negate the concept of a broad-based commodity index. Instead of diversified commodity exposure, the investor may be unduly subjected to micro-economic shocks in one commodity or sector.

To ensure that no single commodity or commodity sector dominates the Index, the DJ-UBSCI relies on several diversification rules. Among these rules are the following:

• No related group of commodities (e.g., energy, precious metals, livestock and grains) may constitute more than 33% of the Index.
• No single commodity may constitute less than 2% of the Index.

The diversification rules will be applied annually, when the DJ-UBSCI is reweighted and rebalanced on a price-percentage basis.

Exchange-traded commodity markets are evolving rapidly. Today's largest commodity futures sector, the energy markets, barely existed twenty years ago. Natural gas futures trading began only in 1990. This evolution creates a potential obstacle for the creation of a stable commodity benchmark. Unlike, for example, broad-based equity indexes, which often include hundreds or thousands of component stocks, the available universe of commodity futures is more limited. Indexes that rely on rigid and mechanically applied rules of inclusion may change drastically over time. The predictability of future index behavior decreases if the composition of an index changes materially from year to year.

At the same time, a commodity index must evolve to accommodate changes in the markets over time. The DJ-UBSCI attempts to resolve these differences through annual reweighting and rebalancing, 5 year averaging of both liquidity and production data along with the diversification rules described above, which should help the DJ-UBSCI respond smoothly to future market developments.

The DJ-UBSCI is reweighted and rebalanced each year in January on a price-percentage basis. The Index Supervisory Committee meets annually to determine the composition of the index in accordance with the rules established in the DJ-UBSCI Handbook. Rebalancing and reweighting means that, in general, the index may reallocate out of commodities that have appreciated in value and into commodities that have underperformed. To the extent that commodity markets exhibit mean-reverting characteristics over time, this approach may help enhance performance.