Expanding on the growing popularity of commodities as an investments class, index provider FTSE, along with DPT Capital Management, has developed an alternative commodity index strategy that could used for future exchange traded funds.
According to a press release, the FTSE launched the FTSE Target Exposure Commodity Index Series, a family of diversified long-short commodity indices, with exposure to 18 commodity futures, such as agricultural, softs, energy, industrial and precious metals.
Specifically, the indices incorporate four equally weighted strategies commonly used by active commodity managers, including momentum long/short, futures curve long/short, trend following and breakout.
In momentum trading, a manager would take a long position in an asset that has shown an upward trending price, or short sell a posotion in a downtrend. For a normal futures curve, a longer maturities date corresponds with a higher price while an inverted futures curve shows diminishing prices over time.
John M. Mulvey, Chairman of DPT Capital and Professor of Operations Research and Financial Engineering at Princeton, explained on a call that instead of the traditional marke-cap weighting scheme, the indices will follow a more diversified equal-weight holding methodology and rebalance monthly. Professor Mulvey also helped develop the first equal-weight ETF, Guggenheim S&P 500 Equal Weight ETF (NYSEArca: GSP).
“Many investors are turning to commodities to provide greater portfolio diversification as well as to protect themselves against a number of risks, including inflation, weather events and rapidly changing supply/demand dynamics,” Professor Mulvey said in the press release.
This new group of indices is part of the growing trend of “enhanced” rules-based indexing that mimics active management styles – the indices try to replicate tactics used by quantitative commodity managers, or CTAs.
“I expect to continue to work with academia,” Jonathan Horton, FTSE president of North America, said on a call, adding that they are reaching out to more “academics and money managers to bring innovative strategies to the market.”
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Max Chen contributed to this article.