Evaluating Commodity Indices in Institutional Portfolios

As an investment analyst at a pension fund, you are tasked with evaluating the role of commodity indices in the portfolio of your institution. Currently, the fund has limited exposure to commodities, and there is a discussion on whether to consider commodity indices as a viable investment option.

Discuss the characteristics of commodity indices, their potential benefits and risks in a diversified portfolio, and how they can influence overall portfolio performance. Additionally, analyze the implications of investing in commodity indices versus individual commodities or commodity-focused funds. Use relevant examples to strengthen your analysis.