Impact of Market Condition on Commodity Indices

Hard Commodities Investment Commodity Indices

As a portfolio manager, you are evaluating different commodity indices for potential inclusion in a diversified investment strategy. You are particularly interested in how these indices capture price movements across various commodities and their implications for portfolio performance. Your research includes looking into the various methodologies used to construct these indices, as well as how rolling contracts in futures markets might impact returns over time.

Considering the rolling yield in commodity indices, which of the following statements correctly addresses the impact of contango and backwardation on a commodity index portfolio?

In a contango market, a commodity index will typically underperform due to the costs incurred from rolling futures contracts.

In a backwardation market, a commodity index will typically outperform because the rolling futures contracts provide positive returns.

Both contango and backwardation provide equal returns to a commodity index as they only reflect spot price movements.

Hint

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