Is Commodity Index Investing Profitable?
Journal of Index Investing, Winter, 2018
Posted: 31 Mar 2018 Last revised: 30 Nov 2018
Date Written: March 27, 2018
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: Suggested Citation