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Morningstar introduces family of commodity futures indices


Investment research provider Morningstar has launched five fully collateralised commodity futures indices, the Morningstar Long/Short, Long/Flat, Short/Flat, Long-Only and Short-Only commo

Investment research provider Morningstar has launched five fully collateralised commodity futures indices, the Morningstar Long/Short, Long/Flat, Short/Flat, Long-Only and Short-Only commodity indices.

Based on a transparent, rules-based momentum methodology, the new family of indices employs different strategic combinations of long futures, short futures and cash (referred to as flat positions).

The indices are designed for investors seeking appropriate benchmarks for commodities and can support the creation of passive investment products that may serve as alternatives to active commodity investing.

‘Futures strategies can provide significant benefits to a long-term, strategic portfolio,’ says Sanjay Arya, director of Morningstar Indexes. ‘They have low correlations to traditional asset classes, offer a hedge against inflation, and can provide diversification through superior returns in bad equity markets.

‘A combination of long and short positions can allow investors to take advantage of the momentum that commodity futures prices often exhibit. We’ve created passive long-short, long-flat, and short-flat commodities indices to increase the options available to investors and to serve as benchmarks for active managers.’

For each commodity, Morningstar calculates a linked price series that incorporates both price changes and roll yield (the loss or gain that results from replacing an expiring contract with one that matures further in the future).

At each monthly rebalancing, Morningstar evaluates whether changes should be made to the direction of the individual commodities in the long-short, long-flat, and short-flat indices. The decision to change direction is based on whether the linked price is above or below its 12-month moving average.

Morningstar Commodity Indices track about 20 commodities weighted according to the dollar value of their open interest, a system chosen because it maintains a diverse exposure across the spectrum of commodities and reflects the importance of each commodity in the global economy.

The indices, which are rebalanced monthly and reconstituted annually, are calculated daily and have a history going back to 1980. Morningstar created its first family of indices in 2002 and now offers a broad US market index, 15 style- and capitalisation-based indices, 15 sector indices, two dividend indices, and 14 bond indices. The firm’s indices are currently tracked by 13 exchange-traded funds.

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