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Dow Jones, UBS launch new commodity index to mitigate contango effects
By Toni Weeks
San Diego, Aug. 8 - Dow Jones Indexes and UBS Investment Bank launched the Dow Jones - UBS Roll Select Commodity index, a version of the Dow Jones - UBS Commodity index.
The new index aims to mitigate the negative effects of contango, or greatest backwardation, on index returns. For each new commodity, the index rolls from the expiring futures contract into the contract showing the least contango, selecting from the contracts with nine months or fewer until expiration.
In contrast, the Dow Jones - UBS Commodity index rolls on a predetermined schedule into specified futures contracts, typically the ones with "nearby" expirations.
The market is said to be in contango when the prices for exchange-traded futures contracts are higher in the distant delivery months than in the nearer delivery months. Keeping other factors constant, contango generally has a negative impact on index returns, as the higher longer-term future prices move lower over time to the shorter-term prices. This potential convergence over time is often referred to as a negative "roll yield."
"With an enhancement that attempts to address the problematic effects of contango on index performance, the new index is designed to roll into contracts that result in the highest annualized roll yield relative to the current contract," Dow Jones Indexes president Michael A. Petronella said in a press release.
New York-based Dow Jones Indexes develops, maintains and licenses indexes for use as benchmarks as the basis of investment products. UBS, with headquarters in New York, is the investment banking arm of Switzerland's UBS AG.
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