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ETF Specialist

A Commodity ETF For All Seasons

A well-diversified commodity ETF with a unique weighting methodology.

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Investors interested in the broad commodity market are faced with a wide range of choices. The two main differentiators between funds are the weighting of each commodity, and whether they implement a methodology that protects the fund from potential negative effects of rolling futures contracts. Understanding these differences is the key to picking the right fund for your investment needs, as funds with slightly different methodologies can have dramatically different returns. Today we'll profile one of our favorites in this broad-basket space:  GreenHaven Continuous Commodity Index (GCC), which offers an unusual and successful methodology.

GCC employs a unique strategy that allocates equally to 17 commodities. This may seem strange when compared with broad equity indexes, which usually weight by market cap. However, equal-weighting is a commodity indexing strategy with a long history; many important academic papers studying the returns of commodities as an asset class have tracked an equally weighted index. Commodity futures are a zero-sum game, meaning that every long position is offset by a short position. As a result, commodities have no market capitalization to weight by, and every index must pick a distinct strategy to follow. Most broad commodities funds weight their portfolios by economic significance, a proxy for market cap, which results in an energy allocation that can go as high as 70%. When investors buy these energy-heavy funds, the returns of agriculture and metal commodities are diluted with a small relative weighting. Not so with GCC, which is more than 80% nonenergy commodities like corn, sugar, and platinum.

Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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