Dow Jones-AIG Commodity Index
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The Dow Jones - AIG Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities.
Unlike equities, which entitle the holder to a continuing stake in a corporation, commodity futures contracts specify a delivery date for the underlying physical commodity. In order to avoid delivery and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as ""rolling" a futures position. The DJ-AIGCI is a "rolling index".
The Index Family
The DJ-AIGCI family of indexes includes both the DJ-AIGCI (which is calculated on an excess return basis) and a total return index based on the DJ-AIGCI (the DJ-AIGCITR). While the former reflects the return of its underlying commodity price movements only, the latter reflects the return on a fully collateralized investment in the index.
In addition, there are nine sub-indexes, representing the major commodity sectors within the index: Energy (including petroleum and natural gas), Petroleum (including crude oil, heating oil and unleaded gasoline), Precious Metals, Industrial Metals, Grains, Livestock, Softs, Agriculture and ExEnergy.
The DJ-AIGCI family of indexes also consists of single commodity indexes on all of the components currently part of the DJ-AIGCI, plus cocoa, in excess and total return versions. In addition, the DJAIGCI family consists of forward indexes, designed to represent the composition of the index one, two and three months into the future, and are named accordingly: DJ-AIG Commodity Index 1 Month Forward, DJ-AIG Commodity Index 2 Month Forward and DJ-AIG Commodity Index 3 Month Forward. The family also includes 3 month forward indexes on each of our single commodity and sector sub-indexes. These forward indexes meet the increasing demand to track exposure to longer-dated commodity futures contracts. Excess and total return versions of each index are available. Yen, Euro, Swiss Franc and Pounds Sterling denominated versions of the DJ-AIGCI and the DJ-AIGCITR also are available.
The Methodology
To determine its component weightings, the DJ-AIGCI relies primarily on liquidity data, or the relative amount of trading activity of a particular commodity. Liquidity is an important indicator of the value placed on a commodity by financial and physical market participants. The index also relies to a lesser extent on dollar-adjusted production data. The index thus relies on data that is endogenous to the futures markets (liquidity) and exogenous to the futures markets (production) in determining relative weightings. All data used in both the liquidity and production calculations is averaged over a five-year period.
The component weightings are also determined by several rules designed to insure diversified commodity exposure. Disproportionate weighting of any particular commodity or sector may increase volatility and negate the concept of a broad-based commodity index, unduly subjecting the investor to micro-economic shocks in one commodity or sector. To help insure diversified commodity exposure, the DJ-AIGCI relies on several diversification rules. Among these rules are the following:
- No related group of commodities (e.g., energy, precious metals, livestock and grains) may constitute more than 33% of the index as of the annual reweightings of the components.
- No single commodity may constitute less than 2% or more than 15% of the index.
In consultation with the DJ-AIG Commodity Index Advisory Committee, the DJ-AIG Commodity Index Supervisory Committee meets annually to determine the composition of the index in accordance with the rules established in the DJ-AIGCI Handbook. The Supervisory Committee consists of employees of AIG-FP and Dow Jones. DJ-AIG Commodity Index Advisory Committee members are drawn from the academic, financial and legal communities. The new target weights for the commodity components were determined and approved by the Dow Jones-AIG Commodity Index Supervisory Committee in August 2007 with changes in index composition effective January 2008.
