What is the Commodity Index?

A commodity Index tracks the price movements of a basket consisting of different kinds of underlying commodities. Commodity indices help traders and investors create benchmarks that reflect the overall performance of the commodity market. 

In this blog, we will give information about the commodity index, its types, and major commodity indices in India.

Commodity Index: An Overview

A commodity index represents essentially a weighted index that gauges the price performance of a certain group of commodities. Commodity Indices are meant to expose traders to the wide world of commodities. Some of the most frequently traded commodities in the portfolio might include crude oil, natural gas, gold and silver.

Commodity indexes are different from other indexes. This is because their returns usually depend only on the price changes of the commodities in the index. Unlike stocks or bonds, commodities don’t pay dividends or interest. As commodities don’t offer these payouts, the commodity index returns are solely based on the price performance of underlying commodities. 

Types of Commodity Indices

Here are some common types of commodity indices:

1. Broad Commodity Indices

These indices cover a broad commodity universe across different sectors. In India, the MCX iCOMDEX Composite index tracks the performance of crude oil, zinc, gold, etc., thereby covering energy, base metal, and precious metal sectors. The most prominent global broad commodity index is the S&P GSCI (Goldman Sachs Commodity Index). It encompasses 24 commodities, ranging from energy to agriculture to metals.

2. Sector-Specific Commodity Indices

These indices focus specifically on commodities of certain sectors such as energy, agriculture, and other products. In India, the MCX iCOMDEX Base Metal index tracks the performance of Aluminium, Copper, Lead and Zinc. Globally, the S&P GSCI Electric Vehicle Metals Index is a well-known index that tracks the performance of cobalt, copper, aluminium, nickel, and iron ore.

3. Single Commodity Indices

These indices show the price performance of a specific commodity, such as gold, crude oil, etc. For example, MCX iCOMDEX Gold tracks the performance of gold. Other examples of single commodity indices in India are MCX iCOMDEX Silver, MCX iCOMDEX Zinc, etc.

Read Also: Understanding Commodity Market Analysis

Benefits of Commodity Indices

Some of the most common benefits of commodity indices include:

1. Diversification

Trading in commodity indices is an excellent way for portfolio diversification. By trading in a commodity index, a trader gains exposure to multiple commodities, reducing the risk of relying on the performance of a single asset class. For instance, the MCX iCOMDEX Base Metal index has futures contracts with a ticker symbol named MCX METLDEX, which consists of futures contracts of aluminum, copper, lead, nickel and zinc as its underlying.

2. Inflation Hedge

Commodities, particularly precious metals like gold and silver, have long been considered a hedge against inflation. When inflation rises, the price of commodities like gold and oil often increases. Trading in futures contracts of Indian commodity indices such as MCX iCOMDEX Bullion and MCX iCODMEX Base Metal can help traders safeguard their portfolios during inflationary periods.

3. Economic Indicator

Commodity indices also serve as indicators of economic health. Since commodities are essential for industries like manufacturing, construction, etc., their prices are often tied to the overall economic conditions. By monitoring commodity indices, traders can gain insights into global demand and supply trends.

4. Access to Commodity Markets 

While commodity trading can be capital-intensive, access to ETFs provides cost-effective options. By investing in ETFs of specific commodities such as gold and silver, you can gain exposure to commodity price movements without having to deal with the complexities of trading individual commodities or managing physical assets.

Major Commodity Indexes: An Overview

Multi Commodity Exchange (MCX) offers 12 commodity indices in total, consisting of composite indices, sectoral indices, and single commodity indices. Indices are given below:

• Composite indices: MCX iCOMDEX Composite index
• Sectoral Indices: MCX iCOMDEX Bullion index, MCX iCOMDEX Energy index and MCX iCOMDEX Base Metal index.
• Single Commodity Indices: MCX iCOMDEX Gold index, MCX iCOMDEX Copper index, MCX iCOMDEX Crude Oil index, etc.

Trading indexes allow you to avoid focusing on specific commodities. It’s an easy method to track the market while minimizing risk. Commodity indices, whether in metals, energy, or agriculture, are an excellent starting place for inexperienced traders. 

How to Invest in a Commodity Market Index?

You can invest in the commodity market index in the following ways:

1. Mutual funds and ETFs can be used to invest or trade in commodities, such as gold and silver. 
2. Another way of trading in commodity indices is through futures contracts. Futures contracts of MCX iCOMDEX Bullion and MCX iCODMEX Base Metal index are available for trading.
3. Futures and options contracts of specific commodities, such as gold, silver, crude oil, copper, etc., are also available for trading.

Read Also: How to Trade in the Commodity Market?

Conclusion

Commodity indices help market participants track the performance of the underlying commodities and also provide a way to diversify their portfolio through investing and trading in ETFs, mutual funds, futures and options.  In India, MCX provides 12 commodity indices, which consist of composite indices, sectoral indices, and single commodity indices. However, it is advised to consult a financial advisor before investing or trading in commodities.

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