Commodity investing is increasing in popularity with the advent of investment products that make this asset class more accessible to individual investors. Numerous commodity ETFs and ETNs are now available, and the total holdings of these ETFs continues to grow. Here is a look at my favorite commodity investment product: the Rogers International Commodity Index (or "Rogers Commodity Index"). I think that this is the best long-term commodity index investment because (1) it is a broadly constituted index that (2) has remained relatively stable since its inception about15 years ago.
One of the main advantages of the Rogers Commodity Index is that it is perhaps the most broad-based commodity index available. Many commodity indexes contain only a small number of different commodities, and those commodities that are contained within the index are heavily weighted towards energy, particularly oil and gas. For example, the S&P GSCI (Goldman Sachs Commodity Index) is over 70% weighted to energy. To me, investing in that type of index only offers a marginal diversification benefit versus just investing in an oil or energy ETF. By contrast, however, at the present time the Rogers Commodity Index contains 36 different commodities traded on 11 different exchanges. The basket of included commodities spans all three main sectors: energy, metals, and agriculture. As this breakdown, shows, at the time of this writing the Rogers Index is widely distributed (click for larger image):
Since the Rogers Index was launched in 1996, the basket of commodities and their relative weighting has not changed dramatically. This means that investing in the index replicates passive index investing as much as possible. Again, this is in contrast to other indexes, which have sometimes made weighting changes that to me seem somewhat arbitrary.
Although the Rogers Commodity Index is the most broadly based index to which I am aware, one could argue that there is room yet for greater diversification here. For example, rice only constitutes 0.5% of the index. Copper constitutes only 4%. Although there are a number of constituents to the index, one could argue that some of the constituents exist in the index to only a token degree. If I'm correct the original thinking was geared towards a weighting that reflected the relative importance of certain commodities in world trade. Certainly oil is the most important of them all. However, I could see a rebalancing of this index that might provide investors with yet greater diversification to all of these important commodities, particularly since it is so easy now to gain exposure to oil investing via one of the many oil ETFs. Regardless, I think that this is a great index to invest in, and can be invested via ETNs on the American exchanges (e.g., RJI) or as ETFs in Germany.