A commodities benchmark is some type of standard which you can compare an investment by. A standard is very helpful for people trying to figure out how much profit they are making compared to other investments. People looking for high rates of returns may want to use other standards than those looking for long-term and safer purchases.
When you use this method to measure your investments, you will want to make sure to use comparable indexes that are relevant to your investment. You do not want to compare your cocoa or coffee investments to nickel or lumber trades, for example. This would not accurately depict how you are doing with your investments. The risk is often higher if you stay in one sector such as lumber though the returns are often higher as well. If you compared your rubber or orange juice exposure to energy commodities, then you would be misled on how well your investments are doing.
When you are trading crude oil, you will want to compare your investments to an energy index. If you are trading in a soft commodity, then you will want to compare your trades with an index weighted to soft commodities. You will also want to compare your investments to investments that are similar in size to your investment. So an ETF in gold should be compared with a precious metals commodity index while an ETF which follows agriculturals like wheat should shadow an index weighted to agriculture.
Another common commodities benchmark for investors is the Dow Jones AIG Commodities Index. The DJ AIG CI is a great index for comparing most commodities, because it is made up of the most heavily traded raw materials in today’s markets. This is one of the most widely used benchmarks also, because it helps investors in ETF’s for example to understand where they are situated compared to average commodity investments.
When using a commodity benchmark, you should always keep in mind that you want a relevant investment index for comparison. This is important, because the risk and growth factors are very different in various investments. If you are placing your capital in sugar, then you would not want to compare your investment to LME aluminium prices. If you did this, your sugar trade would appear to have a low return, even if it performed better than the industrial metals.
You want to make sure that your index has similar goals and strategies for the investors who purchase them. If you are looking for high growth, then you should compare your investment to high growth indexes.
For commodities investments, you will want to compare your investment to commodity indexes. This will show you if your investment is as profitable as other investments that are of the same risk level.
The best index for anyone who is interested in commodities, is an index that tracks commodities such as CRB. When using these commodities benchmarks, you should always be going for beating the index you are comparing. By beating the benchmark, you will know you are in the most profitable investment available in your industry.
The author, Selwyn Petrov, writes exclusively on commodity trading and associated matters. Learn more about the fascinating aspects of commodities benchmarks here.
Posted under Investing
This post was written by Selwyn Petrov on November 22, 2009
