Our Favorite Commodities Index to Watch (Summerhaven SDCI)
When it comes to watching economic indicators- something we do often as an asset management firm- we often look for indices that both tell us something about the underlying asset or market we’re curious about and illustrate what a real investor in that space would experience as far as volatility, returns, risk, etc. Readers of our Quarterly Newsletter are aware that we commonly include some of our favorite indicators of economic bellwethers in the form of ETF’s (Exchange Traded Funds) or other funds that investors can actually own as proxies for the more academic indicator we’re looking at. A great example of this is the Summerhaven Dynamic Commodity Index (SDCI).
We prefer watching financial products over abstract indices and baskets of hypotheticals because we are in the business of financial planning and investment advising. We want to know what our clients would really experience in a given market over a given time period. When we give financial planning advice, it needs to be based on real-world outcomes.
The performance of broad category commodities is of interest to us because it leads expectations of business activity around the globe. Declining commodities often describe conditions of sluggish global trade and slow economic growth. They can also highlight areas of deflation due to technological advancement in extraction of these resources, indications of inflation based on droughts, supply chain disruptions, etc. Commodity price cycles are intricately tied to the market performance of Emerging Market assets, as many of these emerging markets rely on exports of commodities to the developed nations (i.e. Chile’s copper production, Brazil’s livestock, South Africa’s precious metals mining, among countless examples).
Summerhaven’s SDCI is an index we watch closely as it covers crucial commodities such as industrial metals, cash crops such as sugar and coffee, livestock, energy, and staple grains such as soy, corn, and wheat. The index’s impressive methodology speaks for itself, but aside from the academic rigor behind it, we love this index because it has a very effective ETF based on the index we can follow the market profile of religiously: The United States Commodity Index Fund (NYSE: USCI). We regularly track USCI in our newsletter, and it’s a favored indicator of where we see Emerging Markets headed in the future.
Included above is an image showing the six major sectors of the SDCI and how they’re weighted currently: Softs, Livestock, Grains, Industrial Metals, Energy, and Precious Metals. If you’re interested in learning more about this index, we highly recommend visiting Summerhaven’s insightful website.
Lastly, we have to point out this is not at all investment or financial advice involving any financial product- this post is only meant to highlight an interesting way to track the performance of broad basket commodities. Just because commodities are an interesting asset does not mean you should include them in your portfolio. Additionally, just because this index is well constructed from an academic point of view does not mean it is the best asset in its class to invest in- that is a separate area of research you must do as an investor before investing in any asset. We highly recommend consulting with a finance professional before investing in Securities.