The annual commodity index rebalancing is an important event for all commodity futures markets. During this time, the world's two largest commodity indices, the Bloomberg Commodity Index and the S&P GSCI Commodity Index announce their new weightings and rebalance their holdings to reflect those new weightings.

Index investors are major participants in commodity markets, making this annual rebalancing important for trader sentiment and commodity market prices during the rebalancing window in early January.

Index investors in commodity markets are generally investors who use commodity markets as a store of value or a hedge against inflation to protect the value of their portfolios. These groups include sovereign wealth funds, pension funds, and endowments, which invest in a combination of stocks, bonds, real estate, private equity, and commodities.

The two indices in focus are the Bloomberg Commodity Index and the S&P GSEI Commodity Index, with more than $200 billion in assets under management between them.

The two indices are similar in their aim to create a diversified and representative basket of commodity futures that investors can put money into. The key difference is that the GSCI index is production-weighted and more weighted towards energy, while the BCOM Index is production and liquidity-weighted and more broadly diversified. Both indices are liquid and easy to follow, and index investors invest in them both.

There are four questions that are most relevant for this annual index rebalancing:

1. Who are the investors that invest in these commodity indices? Index investors in commodity markets are generally investors that are looking to use commodity markets as a store of value, as a hedge against inflation to protect the value of their portfolios. These are often groups that have big pools of assets, for example, sovereign wealth funds or pension funds or endowments.

2. What are the differences between these two indices? The GSCI index is production-weighted and more weighted towards energy, while the BCOM Index is production and liquidity-weighted and more broadly diversified.

3. How does this rebalance work? The annual rebalancing occurs in early January, with both Bloomberg and S&P announcing their new index weightings in October or November. The rebalancing window occurs between the fifth and ninth business days of January, reflecting the new weights and the relative performance of each commodity market.

4. For which markets does the rebalance matter the most? While some traders argue that the annual index rebalance doesn't matter due to its predictability and the availability of different order types, others contend that it matters for markets with illiquid trade-at-settlement options or where these flows represent a large percentage of open interest or trading volume. Market sentiment is also affected when index investors are buying or selling a significant amount of contracts, particularly for markets where the index rebalance is a significant percentage of either volume or open interest.

Peak Trading Research clients receive weekly updates on the markets that are most vulnerable to these index rebalancing flows. These clients include index funds, hedge funds, family offices, private traders, and many of the largest commercial trading houses in the world. To quantify and anticipate these big index rebalancing flows every year, traders must manage their risk and consider the impact of index investors on commodity markets during this annual rebalancing event.

For a trial of Peak’s actionable commodity research, reach out to us at Insight@PeakTradingResearch.com.