Updated for the 2026-2027 CFA® Level II curriculum.
Two commodity indexes can hold the same underlying commodities and still produce different returns. The gap comes from construction choices: which contracts the index holds, how it weights them, when it rolls positions, and whether it credits collateral interest. For CFA Level II, you need to explain these mechanisms and apply them when headline commodity prices look unchanged.
Quick Answer
Commodity index returns depend on construction, not just on commodity prices. Constituent selection, weighting rules, contract maturity choice, rolling schedule, rebalancing frequency, and collateral treatment all change the reported return, even when spot prices are identical across indexes. The size of each effect depends on the index rules and market conditions. Compare return definitions before attributing a performance gap to skill or commodity selection.
Key Takeaways
Index construction choices help explain why commodity benchmarks can differ even when they hold overlapping commodities.
A spot index tracks price changes only. An excess-return index adds roll yield. A total-return index adds collateral yield on top of excess return.
Weighting method (production weighted, liquidity screened, capped, or equal weighted) determines sector concentration and therefore roll yield exposure.
For long exposure under stable spot prices and curve shape, contango typically creates a negative roll contribution and backwardation a positive one. Changing prices and curves can alter the realized outcome.
Collateral treatment adds a positive return component whenever the reference interest rate is positive, independent of futures price movement.
Identical constituents do not guarantee identical performance if weighting, maturity selection, or roll timing differ.
What You Need to Know for CFA Level II
The LOS requires you to describe how index construction affects returns, not to calculate a specific commodity price forecast.
Know the three return layers: spot return, excess return (spot return plus roll yield), and total return (excess return plus collateral yield).
Explain the usual long-position roll effects under a stable curve, and recognize that a curve label alone does not determine the realized return.
Recognize that rebalancing frequency changes effective sector weights over time, which changes cumulative roll yield exposure.
The weighting example illustrates index construction. The same reading separately requires you to calculate and interpret fully collateralized futures return components.
Inspect constituent and weighting rules
Commodity indexes select constituents using rules such as production value, trading liquidity, or fixed sector caps. Production weighting assigns larger weights to commodities with higher global output value, which often concentrates the index in energy. Liquidity screens exclude thinly traded contracts. Sector caps limit any single sector's weight regardless of production size. Equal weighting assigns the same target weight to each constituent and uses a stated rebalancing schedule to restore that balance.
These choices matter because sector weight determines how much of the index return comes from each commodity's futures curve behavior. An index heavily weighted toward energy will be more sensitive to the energy curve's shape than an index that caps energy exposure.
A related distinction separates three index types by what they measure:
Index Type | What It Captures | Formula Logic |
|---|---|---|
Spot index | Change in current commodity prices only | Spot return |
Excess-return index | Spot return plus the effect of rolling futures contracts | Spot return + roll yield |
Total-return index | Excess return plus the collateral return specified by the benchmark methodology | Excess return + collateral yield |
A spot index and a total-return index covering the same commodities will not produce matching returns over time. The total-return index includes collateral interest and roll yield that the spot index ignores entirely.
Mistake to address. Comparing a spot index and a total-return index as if they measure the same thing. A spot index only reflects price change. A total-return index layers on roll yield and collateral yield. Any return gap between the two is explained by these layers, not by a data error.
Trace contract and collateral choices
Beyond weighting, indexes differ in which futures contracts they hold and how they roll between them.
Futures Contract Selection and Roll Yield
Eligible maturities can be limited to near-month contracts or spread across several months. Rolling schedules specify when the index sells an expiring contract and buys a later-dated one. Diversification across contract maturities changes how exposed the index is to any single point on the futures curve.
Roll yield is the return effect created by this rolling process. When the futures curve is in contango, the next contract trades at a higher price than the expiring one. For a long position under a stable curve, the later contract can lose value as it converges toward a lower spot price.
The quote gap is not an immediate cash loss at the roll transaction. When the curve is in backwardation, the opposite holds, and rolling forward creates a positive roll yield.
Collateral Treatment and Index Performance Differences
Collateral treatment is a separate mechanism. Futures margin is only part of the exposure notional. A fully collateralized benchmark assumes cash or cash equivalents backing the full notional; its methodology specifies the yield credited and treatment of posted margin.
Positive credited yield adds collateral income independently of commodity price movement or curve shape.
Candidates should avoid assuming that identical constituents imply identical performance. Two indexes can hold the same commodities and still diverge because one rolls monthly into steep contango while the other rolls less frequently or holds longer-dated contracts with a flatter curve segment.
Constituent overlap does not control for roll timing or collateral treatment.
Working Example
Index A and Index B use the same energy and non-energy futures sleeves. Index A allocates 60% to energy and 40% to non-energy. Index B allocates 30% and 70%, respectively.
For one holding period, the energy sleeve enters a contract at 72 per unit and exits at 70 as it reaches expiry. The spot price remains 70. The non-energy sleeve enters and exits at 50. Assume full collateralization at each entry price, no fees, no rebalancing within the period, and identical collateral yields. The price changes therefore isolate the futures return associated with convergence.
Step 1: Calculate each sleeve's futures return contribution.
The denominator is the entry contract value used to fund each sleeve. A quote gap divided by the near-month price would use a different convention and should not be substituted here.
Step 2: Apply the starting portfolio weights.
Step 3: Compare the results on the same basis.
Index A loses about 1.67% before collateral income; Index B loses about 0.83%. The difference is about 0.83 percentage points because Index A has twice the weight in the declining energy sleeve.
If both credit a collateral contribution of 1.00 percentage point under an additive exhibit convention, the results become approximately -0.67% and +0.17%. Adding an identical contribution leaves the percentage-point gap unchanged.
Different sector weights create different exposure to the same convergence path. In a broader comparison, also check contract maturities, rolling dates, and cash rules. Weighting alone explains this deliberately simplified example.
Common Exam Traps
Comparing spot and total-return indexes as equivalent
A spot index excludes roll yield and collateral yield entirely. Any return comparison against a total-return index must account for both missing layers before concluding the indexes disagree on price direction.
Assuming identical constituents imply identical performance
Overlap in commodities held does not control for weighting, maturity selection, or roll frequency. Two indexes with the same commodities can still show materially different returns from these construction choices alone.
Calling an optimized roll rule a guarantee
A roll schedule designed to reduce contango drag lowers expected roll cost under historical curve shapes. It does not guarantee a positive or even improved outcome in every period, since curve shape can change.
Ignoring rebalancing and collateral treatment
Rebalancing resets weights back to target, which changes ongoing sector exposure over time. Collateral treatment adds a return layer independent of commodity prices. Skipping either factor when comparing two indexes produces an incomplete explanation of the return gap.
Practice Question
Index A is a commodity excess-return index. Index B holds the same futures positions and uses the same roll schedule as Index A, but Index B also earns interest on fully funded collateral invested in Treasury bills at a positive yield. Over one stated period, futures prices and roll outcomes are identical for both indexes. Use an additive same-period return convention. Which statement about their reported returns is most accurate?
Index A and Index B will report equal total returns because both hold identical futures positions.
Index B will show a higher spot return than Index A because collateral income raises the underlying commodity price.
Index B will report a higher return because its total-return measure includes collateral income that Index A's excess-return measure omits.
Correct Answer: C
Total return equals excess return plus collateral yield. Index A and Index B share an identical excess return because their futures positions and roll outcomes match. Index B adds a positive collateral yield on top of that shared excess return, so its total return exceeds Index A's by exactly the collateral yield amount.
Why Other Options Are Wrong
Option A: Equal futures positions produce equal excess returns, not equal total returns. Collateral yield is a separate return component that Index B earns and Index A does not.
Option B: Collateral income is credited at the index return level. It does not change the spot price of the underlying commodities, so spot return stays identical between the two indexes.
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FAQs About Commodity Index Construction and Return Effects
Why can commodity indexes produce different returns even when they track the same commodities?
Weighting method, contract maturity choice, roll timing, and collateral treatment each add or subtract from the final return independently of commodity price changes.
What separates a spot index from a total-return index?
A spot index reflects price change alone. A total-return index adds roll yield from rolling futures contracts and the collateral yield credited to the fully funded exposure.
Do all providers use the same meaning of a spot index?
No. Some commodity index families use a spot version based on designated futures prices rather than a basket of physical cash quotes. Read the methodology, especially its contract, rolling, and collateral rules. Compare like-for-like series before interpreting a difference as a commodity price effect.