ETFs linked to broad commodity benchmarks, such as the Bloomberg Commodity Index and S&P GSCI, are set for a shake-up as these indices conduct their first annual reviews since the Covid-19 pandemic upended many commodity markets.

Broad commodity indices are about to undergo their first review since the Covid-19 pandemic upended commodity markets.

Both the Bloomberg and S&P Dow Jones indices utilize rules-based processes based on world production and futures contract liquidity to determine a commodity’s target weight in their flagship indices.

While recent market dislocation in each of these areas is evidenced in the latest reviews, both indices incorporate rules that temper any drastic alterations in index composition.

Changes will be implemented from January 2021.

Bloomberg Commodity Index

The Bloomberg Commodity Index is arguably the most popular index for the construction of broad commodity ETF strategies. In Europe, it serves as the basis for the $1.7 billion iShares Diversified Commodity Swap UCITS ETF (ICOM LN), the $500 million Invesco Bloomberg Commodity UCITS ETF (CMOD LN), the $80m WisdomTree Broad Commodities (AIGC LN), and the $60m UBS Bloomberg Commodity Index UCITS ETF (DCUSAS SW).

Additionally, several ETFs track variations of the index that exclude the Agriculture sector or seek to enhance yield through an optimized rolling strategy. Such ETFs are offered by BlackRock, UBS, WisdomTree, Invesco, and DWS.

While there are several ETNs linked to the index, the only US-listed ETF to track the Bloomberg index is the $70m GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB US).

The index is composed of 23 exchange-traded contracts on physical commodities across the Energy, Grains, Industrial Metals, Precious Metals, Softs, and Livestock sectors. No new commodities will be added or removed as a result of the latest reconstitution.

Commodities in the index are weighted two-thirds by liquidity and one-third by global production with caps (max 15%) and floors (min 2%) to the exposure of any single commodity. Additionally, no commodity, together with its derivatives, may constitute more than 25% of the index (e.g., WTI Crude Oil and Brent Crude Oil, together with ULS diesel and RBOB Gas), while no group may constitute more than 33% (e.g., Precious Metals).

This year’s most significant changes include an increase in the target weight of Precious Metals from 17.40% to 19.00%, the sector’s highest allocation since the index’s inception in 1998, driven by a 1.6% increase in Gold. Additionally, Industrial Metals dipped below 16% for the first time in the index’s history, reduced from 17.46% to 15.56%.

The target weight of the Energy sector remained largely unchanged as, amidst an oil price war, feuding producers Saudi Arabia and Russia refused to cut production at the start of the Covid-19 pandemic. Within the sector, the spread between WTI and Brent Crude Oil’s weight widened to its highest level since 2014, driven by heightened trading volumes in WTI as investors sought to capitalize on extreme market conditions.

Target index weights for all commodities, as well as their comparative weights in 2020, are listed below:

Source: Bloomberg.

S&P GSCI

The S&P GSCI is less popular as a reference for ETFs with no European domiciled funds linked to the benchmark, while just one ETP in the US tracks the index, the $700m iShares S&P GSCI Commodity-Indexed Trust (GSG US).

The index is composed of 24 exchange-traded futures contracts on physical commodities across five sectors: Energy, Industrial Metals, Precious Metals, Agriculture, and Livestock. There will also be no new additions or removals from the index next year.

The S&P GSCI is primarily production-weighted but it employs a five-year average, helping to smooth the effects of the Covid-19 disruption. Adjustments for liquidity may be made as necessary to preserve the tradability of the index.

Energy commodities continue to dominate; however, due to significant decreases in the weights of WTI Crude Oil and Brent Crude Oil, the sector will undergo the largest reduction, falling from 61.71% to 53.93%.

Similarly, WTI Crude Oil will have the largest weight decrease of any single commodity, down from 25.31% to 21.78%, but will continue to hold the largest influence within the S&P GSCI.

The Agriculture sector will have the largest sector weight increase, gaining from 15.89% to 19.24%, led by weight increases in Chicago Wheat and Soybeans.

Gold will have the largest percentage weight increase of any commodity, rising from 4.08% to 6.27% and helping to lift the Precious Metals sector to 6.87%.

Target index weights for all commodities, as well as their comparative weights in 2020, are listed below:

Source: S&P Dow Jones Indices.