Soymeal to be biggest winner of fund reweighting - and coffee a big loser
Commodities
29 Nov 2021by Mike Verdin
Twitter
Linkedin
eCard
Soymeal will be, by far, the largest winner, and arabica coffee one the biggest losers, of the annual reweighting process by the big two commodity indexes, Societe Generale said, flagging the potential for “trading opportunities”.
The Bcom and S&P GCSI indexes, followed between them by funds holding more than $200bn, will from January 7-14 implement their annual rejig of the weightings which they apply to their constituent commodities, based on factors such as market liquidity.
Neither index is altering the list of commodities in its index, although there are some alterations to the target percentages for the constituent contracts.
The Bcom is, for instance, lifting its hard red winter wheat weighting to 1.66% next year from 1.57% in 2021, while the S&P GCSI is lifting its corn weighting to 6.54%, from 5.75% this year.
Annual revamp
For index funds, the process means not only adjusting to absorb such revisions, but to correct for price moves too.
This means buying underperformers, to bring their weightings back to that mandated by the index followed, and selling outperformers.
In cash terms, gold will be the biggest beneficiary of this move, with buying of $3.89bn due during the week, with soybeans next on $1.90bn, SocGen said, based on calculations made using current values.
Winners and losers
However, when adjusted for the market size, in terms of dealing volumes, it is soymeal – a big outperformer of 2021- which will see the biggest influence during the reweighting process, attracting buying equivalent to 14.4% of average daily trading volumes.
Lean hogs, will be the second most popular, at 9.5% with feeder cattle next on 8.7%.
By contrast, arabica coffee – a popular bet in 2021, when dryness and frost cut Brazil’s harvest prospects into 2022 – that will attract particularly large selling, equivalent to 11.4% of average daily trading volumes.
That is second only, among the 27 commodities represented in the indexes, to natural gas on 11.6%.
Cotton, poised for selling equivalent to 4.8% of average daily volumes, and sugar, on 4.1%, look poised to suffer too.
‘Trading opportunities’
The reweighting process “can impact commodity prices through two main channels” – through direct index fund purchases and sales, and through front-running by investors “as they anticipate the potential impact the reweighting process might have on prices and/or curve structure”, SocGen said.
Noting that index trading “is typically price-insensitive, with trading usually occurring at the closing/settlement price of the day”, the bank said that “price moves can be exaggerated during this period and can provide trading opportunities”.
It estimated assets under management following the Bcom index at $106bn, and $98bn for the S&P GCSI.
Message Thread
« Back to index