LOS c: Explain why a commodity index strategy is generally considered an active investment.

Commodity index strategies require managers to frequently adjust their positions due to the need to roll over expiring commodity contracts, reweight components due to index rebalancing, and roll over collateral debt securities. Managers who correctly time these activities can add additional return.

Rolling over futures contracts prior to the index rolling them over would be an example of active management. Managers who roll over contracts early attempt to enhance returns by avoiding the higher rolling costs present when attempting to roll over at the same time as the benchmark. Duplicating the rebalancing schedule of the benchmark and using a fixed rule to roll over posted collateral do not represent value-adding activities by the manager.

To maintain long exposure to an index of commodity prices, the manager must periodically roll over expiring futures contracts. The manager must also manage the short-term debt posted as collateral, replacing bills as they mature. The manager can enhance the strategy’s roll yield and collateral yield by carrying out these transactions in ways that minimize costs and take best advantage of market conditions. Price return on the index strategy depends on the direction of prices of the commodities in the index.