CFDs simply offer the proposition that the trader will settle with the broker for the difference in the underlying index price between the start of the trade and the end of the trade, and so becomes the perfect instrument through which to invest in indices.
-Independent Investor
Spot indexes in the commodity asset class are somewhat nuanced in that they don’t actually represent true spot prices of the underlying commodities. This is different from how spot indexes are constructed for other asset classes such as equities and bonds, where the indexes are made up of physical securities.
Commodity spot indexes are made up of baskets of near-maturing commodity futures contracts on the underlying physical assets. This can cause some confusion for investors when those contracts mature and must be reestablished in the index.
This process, sometimes referred to as rolling, is commonly thought to create a return from its mechanics. The prospect of a return is what investors speak of when referencing the infamous roll yield in commodity investing. The only problem is it doesn’t really exist.
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Commodity spot indexes were created as a way to track general price movements of the asset class, a purpose they serve fairly well.
However, when we think about an investment in the asset class, spot indexes break down as a suitable benchmark given the nuances created in their unique methodologies and the unavoidable reality that they don’t represent what an investor might actually be able to experience.
Instead, investors looking to compare how their own portfolios measure against those of an unbiased competitor should compare results against the total return version of the spot index. In doing so, investors get a benchmark that accurately accounts for the process of rolling over maturing futures contracts.
The total-return version of the spot index also adds in a Treasury bill return, bringing it on par with physical investments in the asset class. But that’s an entirely different topic for another time.
Commodity spot indexes generally track spot price movements and are a convenient proxy for the asset class. However, they shouldn’t be viewed as the benchmark for a commodity investment given the possibility of their performance not being achievable.
Similar to stocks and bonds, the total-return version of your favorite index would be a better measurement of your return potential.
Source: Parametric Portfolio (https://www.parametricportfolio.com/blog/what-to-know-about-commodity-price-indexes)
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