Dow Jones-UBS Commodity Index FAQ What does the Dow Jones-UBS Commodity Index track? The Dow Jones-UBS Commodity Index is an index tracking the performance of a weighted group of exchange-traded futures contracts on certain physical commodities. The level of the Dow Jones-UBS Commodity Index therefore goes up or down depending on the overall performance of this weighted group of commodity futures contracts. Although the Dow Jones-UBS Commodity Index tracks the performance of the commodity markets in a manner generally similar to the way in which an index of equity securities tracks the performance of the stock market, there are important differences between a commodity index and an equity index. First, an equity index typically weights the stocks in the index based on market capitalization, a measure that is not applicable to a commodity index. Instead, the commodities included in the Dow Jones-UBS Commodity Index are weighted based on their liquidity levels and their dollar-adjusted production levels, subject to certain percentage restrictions for diversification of commodities included in the composition. Second, unlike stocks, commodity futures contracts expire periodically and, in order to maintain an investment in commodity futures contracts, it is necessary to liquidate such commodity futures contracts before they expire and establish positions in longer-dated commodity futures contracts. This feature of the Dow Jones-UBS CommodityIndex, which is discussed below, has important implications that impact the value of the index. What commodities are currently included? The Dow Jones-UBS Commodity Index currently represents the prices of 22 exchange-traded futures contracts on physical commodities. The commodities (exchange) included in the index for 2012 are aluminum (LME), coffee (NYBOT), copper (NYMEX), corn (CBOT), cotton (NYBOT), WTI crude oil (NYMEX), brent crude (ICE Europe), gold (NYMEX), heating oil (NYMEX), Kansas wheat [KCBT], lean hogs (CME), live cattle (CME), natural gas (NYMEX), nickel (LME), silver (NYMEX), soybeans (CBOT), soybean meal [CBOT], soybean oil (CBOT), sugar (NYBOT), unleaded gasoline (NYMEX), wheat (CBOT) and zinc (LME). What is a commodity futures contract? A commodity futures contract is an agreement to buy a set amount of a physical commodity at a predetermined price and delivery period (which is generally referred to as delivery month ), or to make and receive a cash payment based on changes in the price of the commodity. Generally speaking, the return on an investment in commodity futures contracts is correlated with, but different from, the return on buying and holding physical commodities. The Dow Jones-UBS Commodity Index currently is comprised solely of commodity futures contracts on physical commodities traded on regulated trading facilities.
Why does the Dow Jones-UBS Commodity Index track commodity futures contracts and not physical commodities? While holding an inventory of physical commodities may have certain economic benefits (for example, a refinery could use a reserve of crude oil for the continuation of its operations), it also poses administrative burdens and costs, including those arising from the need to store or transport physical commodities. These requirements and costs may prove unattractive to investors who are interested solely in tracking the price movement of commodities. Why do I see differences in the prices used in the calculation of the Dow Jones-UBS Commodity Index than those seen quoted in the media? The Dow Jones-UBS Commodity Index is composed of exchange-traded commodity futures contracts rather than the physical commodities. By tracking commodity futures rather than commodity spot prices (meaning the prices quoted for immediate payment and delivery of physical commodities), the indices are investable benchmarks, meaning they can generally be replicated using futures contracts. Spot prices, or indices using spot prices, do not account for the effects of rolling futures contracts or the costs associated with actually holding physical commodities. Therefore, the spot price indices are not investable. If the price of the underlying physical commodities goes up, will the level of the Dow Jones-UBS Commodity Index also go up? Not necessarily, for two reasons: First, the Dow Jones-UBS Commodity Index tracks the performance of a collection of commodity futures contracts rather than individual physical commodities themselves. Changes in the prices of commodity futures contracts should generally track changes in the prices of the underlying physical commodities, but, as described above under Why does the Dow Jones-UBS Commodity Index track commodity futures contracts and not physical commodities?, the prices of commodity futures contracts might from time to time move in ways or to an extent that differ from movements in physical commodity prices. Therefore, you may observe prices of a particular commodity going up and the level of the Dow Jones-UBS Commodity Index or subindex not changing in the same way. Second, because commodity futures contracts have expiration dates i.e., dates upon which trading of the commodity futures contract ceases, there are certain adjustments that need to be made to the Dow Jones-UBS Commodity Index in order to retain an investment position in the commodity futures contracts. These adjustments, which are described below and primarily include the mechanic of rolling, may have a positive or negative effect on the level of the Dow Jones-UBS Commodity Index or subindices. As a result, these adjustments may, in certain instances, cause a discrepancy between the performance of the Dow Jones-UBS Commodity Index/Subindices and the performance of the underlying commodity futures contracts. What does rolling a commodity futures contract mean? Since any commodity futures contract has a predetermined expiration date on which trading of the commodity futures contract ceases, holding a commodity futures contract until expiration will result in delivery of the underlying physical commodity or the requirement to make or receive a cash settlement. Rolling the commodity futures contracts, i.e., (i) selling near-dated (i.e., commodity futures contracts that are nearing expiration) commodity futures contracts before they expire and (ii) buying longer-dated futures contracts (i.e., commodity futures contracts that have an expiration date further in the future), allows an investor to maintain an investment position in commodities without receiving delivery of physical commodities or making or receiving a cash settlement.
The Dow Jones-UBS Commodity Index measures a theoretical investment in commodity futures contracts, and therefore takes into account the need to roll the commodity futures contracts included in the Dow Jones-UBS Commodity Index, and reflects the effects of this rolling. Specifically, as commodity futures contracts included in the Dow Jones-UBS Commodity Index approach expiration, the Dow Jones-UBS Commodity Index is calculated as if the commodity futures contracts in the first delivery month are sold and the proceeds of that sale are used to purchase commodity futures contracts of equivalent value in the next delivery month designated pursuant to the index methodology. If the price of the designated commodity futures contract is lower than the price of the first commodity futures contract then included in the index, the rolling process results in a greater quantity of the designated commodity futures contract being acquired for the same value. Conversely, if the price of the designated commodity futures contract is higher than the price of the first futures contract then included in the Dow Jones-UBS Commodity Index, the rolling process results in a smaller quantity of the designated commodity futures contract being acquired for the same value. What do contango and backwardation mean? When the prices for exchange-traded futures contracts are lower in the distant delivery months than in the nearer delivery months, the market is said to be in backwardation. For example, the sale of a January futures contract would take place at a price that is higher than the purchase price of a March futures contract. Holding other factors constant, backwardation generally has a positive impact on index values, as the lower longer-term future prices move higher over time to the shorter-term prices. This potential convergence over time is often referred to as a positive roll yield. For example, if the longer-term price was $40 and the shorter-term prices remained at $50, then one would expect, if other factors remained constant, to earn $10 over time, which would theoretically be realized when the futures contract purchased at $40 was later sold at $50. When the prices for exchange-traded futures contracts are higher in the distant delivery months than in the nearer delivery months, the market is said to be in contango. For example, the sale of a January futures contract would take place at a price that is lower than the purchase price of a March futures contract. Holding other factors constant, contango generally has a negative impact on index values, 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. For example, if the longer-term price was $50 and the shorter-term prices remained at $40, then one would expect, if other factors remained constant, to lose $10 over time, which would theoretically be realized when the futures contract purchased at $50 was later sold at $40. What schedule does each commodity follow as it moves from futures contract to futures contract and when does the rolling take place? Each individual commodity follows its own calendar schedule as it moves from futures contract to futures contract. The roll period is implemented over a five-day period from business day 5 through 9, gradually increasing the weighting from the lead to next futures contract at a 20% clip. The ratio for each contract is implemented at the close of trading. Below is an example of the February 2011 roll period for the WTI Crude Oil Subindex. Business day of the month Date Contract(s) the DJ-UBS WTI Crude Oil Subindex tracks for performance 5th February 7, 2011 100% MAR 11 6th February 8, 2011 80% MAR 11 + 20% MAY 11 7th February 9, 2011 60% MAR 11 + 40% MAY 11 8th February 10, 2011 40% MAR 11 + 60% MAY 11 9th February 11, 2011 20% MAR 11 + 80% MAY 11 10th February 14, 2011 100% MAY 11
Dow Jones-UBS Commodity Index Contract Schedule JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Commodity F G H J K M N Q U V X Z Natural Gas MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN WTI Crude Oil MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN Brent Crude MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN MAR Unleaded Gas MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN Heating Oil MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN Live Cattle FEB APR APR JUN JUN AUG AUG OCT OCT DEC DEC FEB Lean Hogs FEB APR APR JUN JUN JUL AUG OCT OCT DEC DEC FEB Wheat MAR MAR MAY MAY JUL JUL SEP SEP DEC DEC DEC MAR Corn MAR MAR MAY MAY JUL JUL SEP SEP DEC DEC DEC JAN Soybeans MAR MAR MAY MAY JUL JUL NOV NOV NOV NOV JAN JAN Soybean Oil MAR MAR MAY MAY JUL JUL DEC DEC DEC DEC JAN JAN Aluminum MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN Copper MAR MAR MAY MAY JUL JUL SEP SEP DEC DEC DEC MAR Zinc MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN Nickel MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN Gold FEB APR APR JUN JUN AUG AUG SEP DEC DEC DEC FEB Silver MAR MAR MAR MAY JUL JUL SEP SEP DEC DEC DEC JAN Platinum APR APR APR JUL JUL JUL OCT OCT OCT JAN JAN JAN Sugar MAR MAR MAY MAY JUL JUL OCT OCT OCT MAR MAR MAR Cotton MAR MAR MAY MAY JUL JUL DEC DEC DEC DEC DEC MAR Coffee MAR MAR MAY MAY JUL JUL SEP SEP DEC DEC DEC MAR Cocoa MAR MAR MAY MAY JUL JUL SEP SEP DEC DEC DEC MAR Lead MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN Tin MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN Gas Oil MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN Orange Juice MAR MAR MAY MAY JUL JUL SEP SEP NOV NOV JAN JAN Feeder Cattle MAR MAR MAY MAY AUG AUG AUG OCT OCT JAN JAN JAN Soybean Meal MAR MAR MAY MAY JUL JUL DEC DEC DEC DEC JAN JAN 1 This contract schedule and roll methodology reflect the rules of the Dow Jones-UBS Commodity Index and its subindices as of the April 2011 edition of the Dow Jones-UBS Commodity Index Handbook. This schedule and other index rules are subject to change over time. How are the target weights and multipliers determined each year? The composition of the Dow Jones-UBS Commodity Index is recalculated by UBS and CME Group Index Services LLC each year, under the supervision of the Dow Jones-UBS Commodity Index Supervisory Committee, taking into account the relative liquidity and production percentages for each commodity futures contract designated for potential inclusion in the index. The weight of each commodity futures contract included in the Dow Jones-UBS Commodity Index is determined by reference to (i) the commodity liquidity percentage, which is determined based on a five-year average of the trading volume of such commodity futures contract and (ii) the commodity production percentage, which is determined based on a five-year average of production figures.
The commodity liquidity percentage and the commodity production percentage are then combined (using a ratio of 2:1) to establish the commodity index percentage for each commodity. The commodity index percentage is then adjusted in accordance with certain percentage restrictions for the diversification of commodities included in the composition. On the fourth business day of the month of January (the CIM Determination Date ) following the calculation of the CIPs, the CIPs are combined with the settlement prices of all index commodities for such day to create the Commodity Index Multiplier ( CIM ) for each index commodity. The CIMs remain in effect throughout the ensuing year. Once the CIMs are determined, the calculation of the Dow Jones-UBS Commodity Index is an arithmetic process whereby the CIMs for the index commodities are multiplied by the respective prices in U.S. dollars for the applicable designated futures contracts. The products are then summed. The daily percentage change in this sum is then applied to the prior day s Dow Jones-UBS Commodity Index value to calculate the then current Dow Jones-UBS Commodity Index value. After the CIMs are calculated, they remain fixed throughout the year. As a result, the observed price percentage of each index commodity will float throughout the year, until the CIMs are reset the following year based on new CIPs. Does the Dow Jones-UBS Commodity Index have a total return calculation? Yes. The Dow Jones-UBS Commodity Index Total Return Index reflects the returns on a fully collateralized investment in the Dow Jones- UBS Commodity Index. This calculation combines the returns of the Dow Jones-UBS Commodity Index with the returns on cash collateral invested in Treasury Bills. These returns are calculated by using the most recent weekly auction high rate for 3 Month U.S. Treasury Bills, as reported on the Web site www.treasurydirect.gov/ri/ofbills under the column headed Discount Rate % published by the Bureau of the Public Debt of the U.S. Treasury, or any successor source, which is generally published once per week on Monday. Please refer to the Dow Jones-UBS Commodity Index Handbook at www.djindexes.com/commodity for more detailed information regarding the Dow Jones-UBS Commodity Index. Email djindexsupport@djindexes.com or contact one of our customer service representatives at U.S.: +1.609.520.7249 Asia: +86.10.5737.2634 EMEA : +44.20.7176.8888 www.djindexes.com Except where noted, all information as of January 2013. Copyright 2013 by S&P Dow Jones Indices LLC, a subsidiary of the McGraw-Hill Companies, Inc., and/or its affiliates. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. Standard & Poor s and S&P are registered trademarks of Standard & Poor s Financial Services LLC ( S&P ), a subsidiary of The McGraw-Hill Companies, Inc. Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC ( Dow Jones ). S&P Dow Jones Indices LLC, Dow Jones, S&P and their respective affiliates ( S&P Dow Jones Indices ) makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and S&P Dow Jones Indices shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. Past performance of an index is not an indication of future results. This document does not constitute an offer of any services. All information provided by S&P Dow Jones Indices is general in nature and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments offered by third parties that are based on that index. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that seeks to provide an investment return based on the performance of any Index. S&P Dow Jones Indices LLC is not an investment advisor, and S&P Dow Jones Indices make no representation regarding the advisability of investing in any such investment fund or other investment vehicle. For more information on any of our indices please www.spdji.com. The Dow Jones-UBS Commodity Indices are published pursuant to an agreement between DJI Opco, LLC and UBS Securities LLC. The Dow Jones-UBS Commodity Indices are based in whole, or in part, on the Sugar No. 11, Cotton No. 2, Coffee C, Cocoa, Brent Crude, Gasoil and FCOJ-A futures contracts owned by ICE Data, LLP and its Affiliates, and are used by Standard & Poor s Financial Services LLC with permission under license by ICE Data, LLP.