Chicago-based investment research firm Morningstar, Inc. (NASDAQ: MORN) said Monday that Toronto-based BlackRock Asset Management Canada Ltd. has licensed the Morningstar Global Long/Flat Commodity Index to serve as the new benchmark for the iShares Broad Commodity Index Fund (TSX:CBR).
This is the first investable vehicle listed in Canada to track the Morningstar Global Long/Flat Commodity Index.
The index is a fully collateralized commodity futures index that uses a momentum rule to determine if each commodity is held long or the assets are moved to cash, Morningstar says.
“There are two potential sources of return when investing in commodities futures — price change and roll yield,” explains Jeff Logan, head of iShares product, BlackRock Canada.
“We selected the Morningstar Global Long/Flat Commodity Index as the benchmark for our Broad Commodity Index Fund because of its superior methodology that aims to maximize both the changes in commodity prices and the potential returns generated by rolling the future contracts.”
For each commodity in the index, Morningstar calculates a “linked” price series that incorporates both price changes and roll yield (the loss or gain that results from replacing an expiring contract with one that matures further in the future). At each monthly rebalancing, Morningstar evaluates whether changes should be made to the direction of the individual commodities in the index. The decision to change direction is based on whether the linked price is above or below its 12-month daily moving average.
The index tracks the performance of the most liquid exchange-listed commodities futures contracts. Individual commodities are weighted according to the dollar value of their open interest. Morningstar employs this system to maintain a diverse exposure across the spectrum of commodities and to reflect the importance of each commodity in the global economy. The index is calculated once a day, rebalanced monthly, and reconstituted annually.