If you believe the S&P 500, which is market cap weighted, is considered the U.S. stock market beta, then the S&P GSCI, which is world-production weighted (analogous to market cap weighted), is the logical choice for commodity beta. Typically, using an index, namely the S&P 500, as the benchmark for beta is standard practice in trying to describe the behavior of a single stock compared to the market. For example, a healthcare company, say WellPoint WLP, has a beta of .61, and a technology company, say Facebook FB, has a beta of 1.9 (according to Yahoo Finance). What this means is that when the stock market index moves, WLP moves less than the market and FB moves more than the market.
In general, the following rules apply:http://en.wikipedia.org/wiki/Beta_(finance)
While we know generally tech stocks have higher beta than healthcare stocks, not many study the beta of commodity sectors and singles. When examining monthly returns from Aug 2002 – Aug 2013, as one might expect, the beta of the energy sector is greater than 1.0 at 1.25. A less expected observation is that the beta of silver and nickel equal each other at 0.59, yet gold’s beta is only 0.27. Not only were the betas of nickel and silver the same but surprisingly relatively high (ranked 8 and 9 of 24) for the very low weights in the index, only about 40 basis points each. Another surprise was that natural gas, despite its low weight in the S&P GSCI of about 2.5%, had a beta greater than 1.0 of 1.1, and also no single commodity outside of energy had a beta greater than 1.0.
While the S&P GSCI may be the best representation of the commodity futures landscape by its world-production weight, when investors measure beta of a single commodity or sector, they may use the Dow Jones-UBS Commodity Index, also a market leading benchmark. The DJ-UBS CI does use liquidity and production in its weighting scheme; however, it imposes limits on single commodities, groups and sectors since diversification is one of its key principles of construction. Learn more about the differences between the S&P GSCI and DJ-UBS CI.
Using the DJ-UBS CI as a benchmark, it was no surprise the beta of energy was a bit higher at 1.39 than for the S&P GSCI at 1.25 since energy comprises more of the latter index. What was less expected was despite the relatively equal weights of commodities in the DJ-UBS CI as compared to the S&P GSCI, only 4 of 17 commodities outside of energy had a beta of greater than 1.0. Copper, Silver, Nickel and Corn had respective betas of 1.14, 1.14, 1.10 and 1.01. The other surprise was despite a high weight of almost 10% in the DJ-UBS CI, gold only had a beta of 0.55.
Please see the table below for the betas of commodity sectors and singles.
- Source: S&P Dow Jones Indices. Data from Aug 2002 to Aug 2013. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance
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