Is Commodity Index Investing Profitable?

Journal of Index Investing, Winter, 2018

Posted: 31 Mar 2018 Last revised: 30 Nov 2018

See all articles by Tobias Fethke

Tobias Fethke

Leibniz Universität Hannover - Faculty of Economics and Management

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Date Written: March 27, 2018

Abstract

Using a comprehensive dataset of first, second and third generation commodity indices, we investigate the potential diversification benefits of commodities in equity–bond portfolios. To this end, different approaches of mean–variance spanning tests and out-of-sample portfolio optimization are implemented. The results show that first generation commodity indices fail to diversify traditional portfolios and are outperformed by enhanced indices. The diversification benefits of second generation indices are indicated by slightly increased portfolio Sharpe ratios but at the same time challenged as they are spanned by benchmark assets. For third generation commodity indices, the mean–variance spanning hypothesis is rejected but they show heterogenous out-of-sample performances. We thus present new evidence showing that the portfolio performance of the third generation of commodity indices is less clear-cut than found in existing studies.

Keywords: Commodities, Investing, Index

JEL Classification: G11

Suggested Citation

Fethke, Tobias and Prokopczuk, Marcel, Is Commodity Index Investing Profitable? (March 27, 2018). Journal of Index Investing, Winter, 2018, Available at SSRN: https://ssrn.com/abstract=3150121 or http://dx.doi.org/10.2139/ssrn.3150121

Tobias Fethke

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

Marcel Prokopczuk (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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