What is an excess return commodity index composed of?

An excess return commodity index is designed to reflect the total returns that an investor could expect by holding a position in commodities, adjusting for the costs and complexities associated with rolling futures contracts. The key components of an excess return commodity index include both price changes and roll return.

Price changes refer to the changes in the spot prices of the underlying commodities over time. These are essential as they directly impact the value of the commodities held in the index.

Roll return comes into play when futures contracts are maintained in the index. As futures contracts approach expiration, they are typically "rolled" into new contracts with later expiration dates. Depending on market conditions, this rolling can result in either a positive or negative effect on returns, known as contango (where future prices are higher than spot prices) or backwardation (where future prices are lower than spot prices).

By combining these two components, the excess return commodity index aims to capture the full economic benefit an investor would derive from their investments in commodities, making it a comprehensive measure of commodity performance.