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CFA Level II Exam · Introduction to Commodities and Commodity Derivatives

Commodity Indexes and Investment Access: S&P GSCI vs BCOM

Updated 7 October 2026 · Fact-checked

Commodity indexes track baskets of futures contracts, not spot prices. They differ in weighting: S&P GSCI uses world production weights and is energy-heavy, while BCOM caps sector weights and uses liquidity as well as production. Investors gain exposure through futures, ETFs, ETNs, swaps, funds or commodity-linked equities. Match each tool to its risk.

Understand Commodity Indexes and Investment Access

A commodity index is a rules-based basket of commodity futures contracts. You cannot hold most commodities cheaply, so indexes use futures. Their returns come from the spot price change, the roll yield and the collateral return. See the return components topic for these.

The indexes differ mainly in weighting. S&P GSCI is a production-weighted index. It weights each commodity by its world production quantity, so energy dominates. This makes it concentrated and volatile. Bloomberg Commodity Index (BCOM) weights by both liquidity (trading volume) and production, and applies caps on sector and single-commodity weights. It is more diversified. Other indexes, such as the Rogers International Commodity Index (RICI), use broader baskets, and some are equal-weighted or rule-based by other criteria. Indexes also differ in the number of commodities, the roll schedule and the contract maturities held.

Investors can gain exposure in several ways. Futures are direct, liquid and need margin, but the investor manages rolls. Commodity ETFs and ETNs are simple to trade; ETFs hold futures or sometimes physical metal, while ETNs carry the issuer's credit risk. Swaps give customised exposure but carry counterparty risk. Managed funds and CTAs add active management. Commodity-linked equities (producers) are easy to hold, but they carry equity market risk and company-specific risk, so they do not track commodity prices precisely. Physical holdings have storage and insurance costs.

Commodities help portfolios in two ways. They tend to have low or negative correlation with stocks and bonds over many periods, so they may diversify. Unexpected inflation often lifts commodity prices, so they may hedge inflation. Neither is guaranteed. Correlations can rise in crises, and returns depend on the futures curve and roll yield, not only on spot prices.

Key formulas to remember

Commodity index return
Total return = spot return + roll return + collateral return
Futures-based indexes earn all three. Roll return is positive in backwardation and negative in contango.
Production weighting (S&P GSCI)
Weight ∝ world production quantity × futures price
Energy ends up with the largest weight. Weights shift as prices change.
BCOM weighting rule
Weights based on liquidity and production, with caps on sector and single-commodity weights
Caps limit concentration, giving a more diversified index than S&P GSCI.
Equity-linked exposure
Producer equity return ≠ commodity price return
Equities add operating leverage, hedging and market beta, so tracking is loose.

How to solve Commodity Indexes and Investment Access questions

Use this method for any vignette question on indexes, access vehicles or portfolio role.

  1. 1Identify what the question asks: index construction, vehicle choice or portfolio role.
  2. 2Find the data in the vignette: sector weights, index rules, the futures curve shape and the investor's goal.
  3. 3For index questions, decide the weighting basis (production, liquidity, caps, equal) and link it to concentration and diversification.
  4. 4For vehicle questions, list the key risk of each option: roll and margin for futures, issuer credit for ETNs, counterparty for swaps, equity beta for stocks.
  5. 5For portfolio role, check correlation with stocks and bonds and the link to inflation, and note that both can change in a crisis.
  6. 6Pick the option that fits the stated goal and constraints, and eliminate those that contradict the vignette.

Quickest way: Weight, vehicle, risk

When to use it: When you have under two minutes for a three-option question.

  1. Ask: production-weighted (GSCI, energy-heavy) or capped and liquidity-based (BCOM, diversified)?
  2. Match the goal to the vehicle: pure exposure goes to futures or ETF, tailored goes to swaps, indirect goes to equities.
  3. Name the one risk that fits the vehicle and remove options that ignore it.
  4. Treat 'always' or 'guaranteed' hedge claims as wrong.

Common mistakes in Commodity Indexes and Investment Access

  • Saying BCOM is production-weighted only.

    Students mix up the two indexes.

    Fix: Remember BCOM uses liquidity and production with caps; only GSCI is purely production-based.

  • Assuming commodity equities track commodity prices closely.

    Both seem tied to the same commodity.

    Fix: Equities carry market beta, leverage and company risk, so the match is partial.

  • Ignoring roll yield when judging index returns.

    Focus is on spot prices.

    Fix: Index returns include roll return, which is negative in contango, even if spot rises.

  • Treating commodities as a guaranteed inflation hedge.

    Textbook phrasing is read as a rule.

    Fix: They tend to respond to unexpected inflation, but the link is not certain.

  • Overlooking ETN credit risk.

    ETNs look like ETFs.

    Fix: An ETN is an unsecured debt of the issuer, so it carries issuer credit risk.

Worked examples

Example 1

Vignette: A global pension fund is considering two commodity indexes. Index A weights each commodity by world production, and energy is 60% of it. Index B uses production and liquidity with sector caps, and energy is 30%. The fund wants broad diversification and lower concentration. (1) Which index is more likely the S&P GSCI? (2) Which better fits the fund's aim? (3) Which vehicle gives the fund a tailored exposure with counterparty risk?

Show the solution
  1. (1) Production-only weighting with high energy share points to the S&P GSCI, so Index A.
  2. (2) The fund wants diversification and lower concentration. Caps on sectors and liquidity weighting in Index B (BCOM-like) deliver that.
  3. (3) Swaps are customised and carry counterparty risk.

Answer: (1) Index A; (2) Index B; (3) a commodity swap.

Example 2

Vignette: An investor holds an ETN linked to a commodity index and a position in shares of a mining producer. The index's futures curve is in contango. Spot prices rise 4% over the year. (1) What is the likely sign of roll return? (2) Will the ETN return necessarily equal 4%? (3) What extra risk does the ETN carry versus an ETF?

Show the solution
  1. (1) Contango means longer-dated futures cost more than near ones. Rolling a long position gives a negative roll return.
  2. (2) Total return is spot + roll + collateral. With negative roll, the return need not equal 4%. It could be above or below depending on collateral and roll sizes, so it is not necessarily 4%.
  3. (3) An ETN is an unsecured note, so it carries the issuer's credit risk.

Answer: (1) Negative roll return; (2) No, not necessarily 4%; (3) Issuer credit risk.

Exam tips

  • Link each weighting method to its result: production weighting means energy concentration, caps mean diversification.
  • In vehicle questions, always name the specific risk: roll, credit, counterparty or equity beta.
  • Read the futures curve shape in the exhibit before judging index returns.
  • Beware of absolute words such as 'always hedges inflation' or 'guarantees diversification'.

Commodity Indexes and Investment Access: frequently asked questions

What is the main difference between S&P GSCI and BCOM?

S&P GSCI weights commodities by world production, which makes it energy-heavy. BCOM uses liquidity and production and caps sector and commodity weights, so it is more diversified.

Why do commodity indexes use futures instead of spot prices?

Holding physical commodities is costly and often impractical. Futures give exposure cheaply, but returns then include roll return and collateral return, not just spot changes.

Are commodity equities a good substitute for commodity futures?

Only partly. Producer shares respond to the commodity price but also to equity markets, leverage and company decisions, so tracking is imperfect.

Do commodities always hedge inflation?

No. They tend to rise with unexpected inflation, but the relation is not guaranteed and depends on the commodity and the period.