Commodities are now widely recognized as an investment asset class alongside more traditional asset classes such as stocks and bonds and have been for some time. They offer investors the opportunity to achieve equity-like returns and are also suitable for strategic portfolio diversification.

Since the early nineties, the two major avenues available for investing in commodities have been:

  • Traditional commodity indices - comprised of rolling short-term futures contracts
  • Tailored baskets of commodity futures contracts - composed of longer dated contracts

Both strategies served the purpose well for an extended period of time. However, traditional indices have recently shown their limitations. This has been highlighted by a significant roll loss component in index returns, largely attributed to the fact that investors have been limited to short dated maturities in major indices.

One alternative to mainstream benchmark indices has been tailor made baskets of futures contracts. Concerns that investors often have with this solution include the lack of price transparency, the absence of brand recognition and other aspects such as the lack of weighting control and appropriate rebalancing mechanisms.

The problem of roll losses.

Traditional commodity indices, with their high energy sector weightings, have experienced a significant negative roll yield in the past at the times when the forward market has been in contango. This contango tends to be especially steep at the near end of the market, where most traditional index futures are located. In such cases the monthly roll, which involves the sale of a maturing contract at one price and purchase of a further dated contract at a higher price, causes a loss for the investor each time it is executed. The steeper the futures curve, the larger the roll losses.

The UBS CMCI - a simple yet innovative solution.

UBS CMCI believe that the solution to many of the recent issues faced by investors lies not in creating increasingly complex vehicles, but in providing improved access to the commodity futures market through the innovative principle of constant maturity. The UBS CMCI (Constant Maturity Commodity Index) allows you to easily diversify across commodities and maturities and more efficiently adapt your commodity index investment to your portfolio needs and the changing economic environment. For the first time in a standardized commodity index, investors are now able to define their commodity maturity preference and fix it permanently on the time horizon using the constant maturity principle - a milestone in commodity index investment.

Currency-hedged indices have been introduced to facilitate CMCI investment in currencies other than the US Dollar. Currency-hedged indices shield the notional investment of non-USD based investors from variations in currency exchange rates.

You can find more detail about the constant maturity process in the methodology section.

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