Commodity indices like the MCX iCOMDEX index family are constituted of futures contracts, unlike the equity indices that are based on cash prices. This makes commodity indices unique.
What are their unique characteristics?
Firstly, the construction of commodity indices are often based on some unique principles. The MCX iCOMDEX, for instance, takes into account the physical market size of the commodities across the country while determining the weights of the respective index constituents.
Secondly, every constituent contract of a commodity index has a definite life and ‘expires’ at the end of this life.
For continuity of the index, therefore, the constituent contracts are ‘rolled over’ from one expiry to another. The roll over happens on pre-decided dates called ‘roll over days’. The rollover days of the MCX iCOMDEX Bullion Index, for instance, are two business days just before the first day of staggered delivery tender period of MCX Gold or MCX Silver futures contracts.
Thirdly, as the constituent contracts roll over between two expiries, the index captures the difference between the returns of the two expiries. In doing so, it gives rise to a ‘roll return’. That is why commodity indices like MCX iCOMDEX are referred to as ‘excess returns’ indices, which means that the index investor gets a ‘roll return’ over and apart from the return from the price movement of the constituent commodities.
How does the ‘rollover’ of the index constituents take place?
Watch out this space next week.