What are commodity indices?

On 20 December 2019, India’s financial market witnessed the launch of India’s first tradable commodity index series with representation from all sectors of the commodity markets, the MCX iCOMDEX Indices. The launch of this index series paves the ground for introduction of financial products (such as futures, options, ETFs, etc.) on commodity indices, for the first time in the country. Subject to approval by SEBI, financial products on these indices can soon become available and one can take exposure to commodity markets through such financial products.

What are commodity indices? Like equity indices, commodity indices like MCX iCOMDEX are composed of instruments traded on the exchange platform. However, unlike the former where the constituents are cash equity scrips, the latter are constituted of commodity futures contracts. Thus, the MCX iCOMDEX are indices created from the futures contracts traded on MCX. The index family consists of:

* A Composite Index, which is constituted from eleven commodity futures across different segments traded on MCX,

* Two sectoral indices (Bullion Index and Base Metal Index) constituted of the bullion and base metals futures traded on MCX, and

* Four single-commodity indices (Gold Index, Silver Index, Copper Index and Crude Oil Index), which are constituted of futures of the respective commodity futures traded on MCX.

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Being composed of futures contracts, commodity indices have some unique characteristics not found in equity indices.

What are these unique characteristics? Watch out for this space next week.

NOTE: MCX has started a knowledge series to educate investors on the benefits of iCOMDEX indices. This is the first part.