TY - JOUR T1 - Factor Model Index for Commodity Investment JF - The Journal of Index Investing DO - 10.3905/jii.2021.1.110 SP - jii.2021.1.110 AU - Daniel Broby AU - Andrew McKenzie AU - Olivier Bautheac Y1 - 2021/10/26 UR - https://pm-research.com/content/early/2021/10/26/jii.2021.1.110.abstract N2 - In this article the authors propose an appropriate commodities benchmark for pension funds. Commodity investment, like traditional investment, requires suitable benchmarks for performance measurement and attribution. Investing in commodities as an asset class has increased dramatically as a result of financialization. It is typically conducted by pension funds through the futures market. The tools to implement and benchmark the success or failure of such an investment strategy are still in their infancy. The authors argue that factor model indexes (FMIs) are a viable alternative to existing production-based indexes that make use of futures contracts. Using principal component analysis, they identify five factors related to grains, meats, industrial metals, energy, and precious metals. They suggest that FMI benchmarks constructed using such an approach would allow commodity investors to better measure their investment objectives.Key Findings▪ Proposed commodity factor model index (FMI) derived from principal components for use by institutional investors.▪ The FMI addresses the issue that the market capitalization concept does not make sense when applied to commodities.▪ The FMI is a viable alternative to existing production-based indexes that make use of futures contracts. ER -