The cost of picking the wrong commodity index

The cost of picking the wrong commodity index is significant and means that extra care must be taken when investing in any commodity product. 

The charts above show the annual return and volatility for some of the major commodity indices over the last three and five years. Note the wide dispersion in in returns and risk. The return differential over five years is over 950 bps while the risk difference is about 725 bps. Over a three year period, the difference in return is slightly above 575 bps. The volatility difference is much lower at only 250 bps. The differential in information ratio from these differences in return and risk are also significant. The range over 5-years is between .22 and -.23. For three years, the range is between .40 and .06 over a three year period.

There is no such thing as saying you will just invest in the commodity benchmark. In equities, the S&P 500 is the dominant benchmark, bu tin commodities there has been switching between the S&P 500 and DJUBS. If we look at just those two indices, the return difference over 20 years is 182 bps; for 5-years 14 bps; and for three years 88 bps. For volatility, the difference for 20, 5, and 3-years is respectively 620 bps, 600 bps, and 250 bps. This is clearly much tighter than the CRB, Rogers or Equal weighted indices.