Jared Cummans: For years, issuers and investors alike have been trying to find unique ways to slice and dice the commodity market to find the best returns. Some prefer to buy into depressed assets, while others have employed strategies that focus in on a specific segment of the broad space. But for every methodology out there, thevolatility of the commodity world will, at some point, throw a wrench into even the best laid plans. It is not unusual to see some of these assets move by 3% or 4% in a single trading session, a double-edged sword for traders [for more commodity news and analysis subscribe to our free newsletter].
Now, a new index aims to take advantage of volatile commodities with a unique strategy that has yielded some impressive results. The Commodity Volatility-Weighted Index from Compass Efficient Model Portfolios (CEMP) takes a new approach to commodity investing. The index finds the twenty most liquid commodities which are then weighted based on their daily standard deviation over the last 180 days compared to the aggregate mean. The most volatile commodities are given the lowest weighting while the least volatile are afforded a larger position.
The index was back-tested 10 years and it outperformed the Dow Jones-UBS Commodity Index (NYSEARCA:DBC) in 8 of those years. Cumulatively since 2000, the new CEMP index gained over 214%, while the Dow Jones competitor jumped by only 75%. Considering that the Dow Jones index is the standard benchmark for the commodity industry, the results are quite impressive [see also The Ten Commandments of Commodity Investing].
For now, there are no funds that track the index, but knowing how quickly the ETF world moves, it should not be a surprise to see one pop up in the near future. Keep your eyes peeled for any news of a coming fund to play this one-of-a-kind index.
CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.