Magazine article Modern Trader

An Index of One

Magazine article Modern Trader

An Index of One

Article excerpt


When the Shad/Johnson accord was dissolved in 2000 it ushered in the age of security futures products. Now with the explosive growth of interest in commodities, "commodity securities products" are being created at a rapid pace. Gold, silver and crude oil are being benchmarked as underlyings for exchange- traded-funds.

Soon there could be an ETF for every commodity out there. Or at least every commodity in the Dow Jones AIG Commodity Index (DJ-AIGCI) - plus one - as Dow Jones and AIG announced the creation of 20 new single commodity sub-indexes. The indexes will include the 19 components of the DJ-AIGCI plus cocoa. .

The announcement did not include any mention of ETFs based on the sub indexes, but that would be a logical step in its development. John Place, business director for commodity indexes at Dow Jones, says when the DJ-AIGCI came out six years ago, commodifies were a confused asset class, but that has changed.

"As we know the markets have taken off and there is a tremendous demand for commodities now," Place says. "We had this broad index, we had customers telling us that the marketplace is more sophisticated and they want to get very specific with commodities."

Ironically it could be the rise of money in long-only funds benchmarkcd to commodity indexes like the DJ-AIGCI that is creating the need for the single commodity indexes. As the estimated $80 billion benchmarked to these indexes whip individual commodity futures around, traders may look at the single commodity index as a way to determine what is driving movement in the futures.

"This brings clarity to the specific level of the commodity that you are interested in," Place says. …

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