What Is the Dow Jones Commodity Index (DJCI)?
The Dow Jones Commodity Index (DJCI) is a weighted index that tracks a wide range of 28 different commodity futures contracts, including metals, agricultural products, and energy commodities such as oil and gas.
- The Dow Jones Commodity Index (DJCI) is a broad measure of the commodity futures market that emphasizes diversification and liquidity through a simple, straightforward, equal-weighted approach.
- Its weightings are adjusted annually to ensure that no individual commodity or commodity groups hold a disproportionate influence over the index total.
- The index tracks 28 different commodities, from agricultural to precious metals to energy products.
How the Dow Jones Commodity Index (DJCI) Works
The DJCI is an index that represents the weighted market value of various commodities futures contracts. The contracts represented by the index are weighted based on commodity production levels and the liquidity of the underlying contracts. Each year, the index is rebalanced based on the criteria that no individual commodity can represent over 20% of the index and a minimum weight for inclusion of 0.25%. Similarly, the rebalancing ensures that no one grouping of contracts can represent over one-third of the total.
There are two principal uses of the DJCI. First, it provides valuable market information for investors and analysts who wish to keep abreast of the general state of commodity markets. Second, it allows traders to speculate on commodity prices by using exchange-traded notes (ETNs) whose pricing are linked to the DJCI.
These ETNs are functionally similar to exchange-traded funds (ETFs). However, whereas ETFs are market-traded investment vehicles used to invest in equity securities, ETNs are unsecured debt instruments that are issued by underwriting banks. Under the terms of these debt instruments, the investor is entitled to repayment of a specified principal value which fluctuates based on the performance of an underlying benchmark. In the case of ETNs that are linked to the DJCI, the investor would therefore obtain a higher repayment value if commodity prices rise. Conversely, lower commodity prices would lead to a loss upon maturity of the debt instrument.
ETNs provide an attractive way for investors to participate in the commodities markets because of their high liquidity relative to purchasing underlying commodities. Also, ETNs today are highly accurate in tracking their underlying benchmarks, due to the highly computerized nature of the modern financial markets. For investors who suspect that commodity prices may decline, ETNs can also be sold short for speculative or hedging purposes.
History of the Dow Jones Commodity Index (DJCI)
The commodity index was initially created by American International Group (AIG) in 1998, in an effort to meet the then-growing market demand for distinct market indices focused on alternative assets. Upon its inception, the index focused on a group of 19 commodities.
In 2009, the rights to the index were purchased by the UBS Group (UBS), which renamed it the Dow Jones-UBS Commodity Index. Most recently, UBS decided to switch its partnership from Dow Jones to Bloomberg in 2014, forming the Bloomberg Commodity Index (BCOM). In October of 2011, S&P Dow Jones re-launched its version of the Commodity Index (the DJCI) on its own.