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CRB index – one of the popular commodity market benchmarks [Guide]
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CRB index – one of the popular commodity market benchmarks [Guide]

created Forex Club7 May 2024

Raw materials may be an interesting idea when building an investment portfolio. It's worth mentioning that Ray Dalio recommends having more than 10% of assets in raw materials in its All-Weather Portfolio. In the article you will also learn how to invest in solutions based on the CRB index. The CRB index, i.e. the FTSE/CoreCommodity CRB index, is a great benchmark for the commodity market. For this reason, it is worth carefully analyzing the composition of the index and its advantages and disadvantages.

Why is it worth investing in raw materials?

Raw materials is a broad concept because it includes both agricultural goods, which are used mainly by the food industry, and industrial metals needed, for example, in construction. We also cannot forget about rare earth metals, which are crucial in the production of smartphones and chips. As you can see, the range of uses of raw materials is really wide. It is worth remembering that some raw materials are an economic barometer. This is a great example copper, which is often called “Dr. "Copper". This is because copper can often be used as economic situation indicator. Copper is used in various sectors of the economy. If the economic situation, e.g. in the construction industry, is weaker, the demand for this product decreases. Due to the fact that the supply of raw materials is not very flexible in the short term, the decline in demand will affect the market price. Therefore, an increase in copper prices (in the absence of factors limiting production) may mean an improvement in the global economy. However, a drop in prices may indicate that the economic situation is cooling down and that the income of companies in many industries will soon decline. In extreme cases, the cooling of the economic situation may turn into... recession, which may affect the stock market.

Commodities are also less correlated with the broader stock market. Thanks to this, the investor has a chance to create an investment portfolio that is more resistant to a bear market. Commodities are also an interesting idea in cases of long and high inflation. Such an environment may result in a sharp increase in commodity prices, which may guarantee high profits for holders ETFs, ETNs, ETCs or derivatives based on changes in the price of raw materials.

Raw material prices can be volatile

It is worth remembering that the supply of raw materials may also be disturbed by external factors. These include, for example: war, political disputes between countries or weather factors. Let's consider each of the above reasons.

For example, the war in Ukraine caused an increase in grain prices in 2022 because the supply of Ukrainian grains on the market decreased. The reasons for the decline in supply were various. These included the mining of fields and the blockade of Ukrainian ports by the Black Sea Fleet. In January 2022, i.e. a month before the war, the price per bushel of wheat was approximately $7,6, in May 2022 the price of wheat approached $12 per bushel.

1 wheat price

Wheat price. Source: stooq.pl

Political factors include, for example, an export embargo oil to "Western" countries, carried out by the OPEC cartel in the 70s. The reason was the support of the US and its allies for the state of Israel, which some Arab countries did not like. The limited supply of this raw material on the market in Western Europe and North America resulted in a drastic increase in the prices of chemicals and fuels. This led to the so-called "fuel shock". Over time, this led to changes in customer behavior and changes in the automotive industry (models with lower fuel consumption became increasingly popular).

The weather also has a major impact on changes in the prices of raw materials, especially agricultural ones. This is a great example Kakaowhich the price between May 2023 and April 2024 increased by several hundred percent. The reason was unfavorable weather and cocoa diseases. The above-mentioned factors led to a decline in the supply of the raw material, which had an adverse effect on its price. As you can see from the examples below, raw material prices can fluctuate greatly. Therefore, raw materials can often move opposite to the stock market.

2 cocoa price

Cocoa price chart. Source: stooq.pl

Why is investing directly in raw materials difficult?

If you would like to invest in raw materials on the spot market, you will face many problems. These include:

  • difficult access to the spot market and the so-called knowledge gap,
  • the need to store goods,
  • problems with subsequent sales.

If you want to trade e.g. uranium the necessary permits that must be met are quite large, so a short speculation on the spot market is out of the question. Even if access to trade corn or wheat is less legally demanding, so here too you simply need to know yourself. In the case of, for example, cocoa, you need to know the specifics of the market, be able to distinguish good beans from poor ones, and fly to Africa or South America to build relationships with producers. It is time-consuming and without large capital it is simply unprofitable.

Even if you buy a given product, you will have to solve significant logistical problems. First of all, you need a place to store the goods. Each raw material or agricultural product has different characteristics and requires different storage conditions. This entails the need to build specialized warehouses or rent such places at a market price. In addition, you need to ensure efficient transport of such raw materials, either by yourself (purchase of means of transport, employment of drivers) or using the services of transport companies. Therefore, storing goods is expensive and logistically difficult.

Another problem is finding a buyer for the purchased goods. Sometimes this requires building relationships with potential audiences, which is time-consuming. Many raw materials have high storage costs, which means they need to be turned over very quickly. If we fail to sell the stored goods, it may turn out that they will not meet market requirements and it will be necessary to accept a loss on the investment.

It is much easier to invest in raw materials through financial instruments, including: futures contracts, options, CFD or ETFs. One of the most popular indexes that are a benchmark for many financial products is CRB Index.

What is the CRB index?

In the first half of the 20th century, the American capital market suffered from weakness in analytical reporting. Investors lacked tools that would allow them to easily track the behavior of raw material prices. He noticed a niche Milton Jiler, which he founded Commodity Research Bureau. After many months of work and consultation, the CRB index was developed, which was intended to easily calculate how they are changing  prices on the raw materials market. Years later, it turned out that CRB has become one of the key benchmarks for investors on the commodity market.

The grandson of the original CRB index is FTSE/CoreCommodity CRB. The index itself was created in 1957 and was developed by the Commodity Research Bureau. At the beginning, the index included 28 commodities. Among them were, among others: agricultural goods (barley, wheat, corn, onion, rye, soybeans), processed products (including soybean oil, cottonseed oil). In addition, there were popular raw materials such as Cotton, copper, cynk, cocoa. The reason for this selection of raw materials was that they were widely used in industry, had a high degree of standardization, and were easy to collect uniform prices. Initially, it did not contain highly processed products, such as gasoline. Unprocessed products responded faster to changes in demand and supply on the market than in the case of highly processed products (where the price of the products also resulted from the costs of processing raw materials and implementing the production process). However, after some time, processed products were also included in the index.

However, with economic development, the proportion of raw material use changed. As a result, index revisions occurred frequently. Initially, the CRB index was designed to synthetically reflect changes in the prices of key raw materials for the economy in the mid-20th century. Along with the transformation of the economy, the structure of raw material consumption also changed. Hydrocarbons (oil, gas) and oil-based products (heating oil, gasoline) began to play an increasingly important role.

3 crb index

The current structure of the CRB index. Source: FTSE

As you can see, the current largest position is WTI crude oil. It is worth noting how small a share in the index is wheat, which is an important raw material consumed by billions of people. At the same time, relatively illiquid cash markets, such as: kawa or cocoa. An important date in the development of the index was 1985, when futures contracts for the mentioned index appeared. The process of rapid financialization of raw materials has begun. From this point on, raw materials could be used futures contracts be in the portfolio of many investors.

The advantage of the CRB index is that the cross-section of raw materials is really large. It includes agricultural produce, breeding products, industrial and energy raw materials. Therefore, this type of index provides great diversification in terms of the type of raw materials. If someone is looking for a product that covers various commodity markets, CRB is an interesting benchmark.

ETF with exposure to the CRB index

European investors can invest in ETFs with exposure to the CRB index. Unfortunately, the choice is not very wide for the European investor.

Lyxor Commodities Refinitiv/CoreCommodity CRB EX-Energy TR UCITS ETF – Acc

The mentioned ETF gives exposure to raw materials included in the CRB index, but with the exception of energy ones. This means that we will not obtain exposure to, among others, for oil, gasoline or gas. Therefore, this product allows you to invest in industrial raw materials and agricultural produce. As you can see in the chart below, the structure of the benchmark (and therefore the ETF) is slightly different. It is worth noting that the share of precious metals in this ETF is over 11%, while almost 10% is held by, among others, soybean, corn, copper, aluminum material or cattle.

4 Lyxor Commodities Refinitiv

Source: FTSE

The ETF itself is quite expensive as its annual fee (TER) is 0,35%. These are large values, but please remember that this ETF reflects the index in a synthetic way. Synthetic replication introduces the risk of a counterparty (which may not fulfill its obligations under the swap agreement). The product itself has not gained enormous popularity because its assets amount to approximately €100 million. The ETF has gained over 5% in value over the last 50 years. This is a decent result, but it should be remembered that most of the return was generated in 2021 and 2022.

Brokers offering ETFs, stocks and commodities

How to invest in commodities? Of course, the simplest option is to buy contracts for a specific commodity - either CFDs or more expensive futures contracts. Another option is to buy shares of companies from a given industry (e.g. mining), but for people who want to well diversify and balance their portfolio, investing in whole ETFs will be a better choice. An increasing number of forex brokers have quite a rich offer of stocks, ETFs and CFDs for these instruments. For example on XTB Today, we can find over 3500 companies and 400 ETFs, a Saxo Bank as many as 19 shares and approximately 000 ETFs.

Broker xtb 2 saxo bank logo small etoro
Country Poland Denmark Cyprus
Number of exchanges on offer 16 exchanges 37 exchanges 21 exchanges
Number of shares in the offer approx. 3500 - shares
approx. 2000 - CFDs on stocks
19 - shares
8 - CFDs on stocks
3 - shares
The amount of ETF on offer approx. 400 - ETF
approx. 170 - CFDs on ETFs
3000 - ETF
675 - ETF CFDs
323 - ETF
Commission 0% commission up to EUR 100 turnover / month according to the price list 0% commission*
Min. Deposit PLN 0
(recommended min. PLN 2000 or USD 500, EUR)
PLN 0 / EUR 0 / USD 0 100 USD
Tool xStation SaxoTrader Pro
Saxo Trader Go
EToro platform

*Zero commission means no brokerage/transaction fee was charged during the activity. However, they may still incur general fees, such as currency conversion fees for deposits and effects in non-USD currencies, fees for fees, and (if applicable) inactivity fees. Market spread also applies, although this is not a "fee" charged by eToro.

76% of retail investor accounts lose money when trading CFDs with this provider. Consider whether you can afford the high risk of losing your money.

Summation

CRB is an index that reflects the behavior of the market for raw materials that have a significant impact on many business segments (e.g. copper) as well as ordinary agricultural products. The index itself has been gradually financialized for over 30 years. There are also ETFs with exposure to this market. However, it is worth considering whether instead of buying an ETF with exposure to the index, it may be better to buy shares of well-managed mining companies. These types of companies may gain significantly in value if a great raw material boom begins.

This article is for information only. It is not a recommendation and is not intended to encourage anyone to undertake any investment activities. Remember that every investment is risky. Do not invest money you cannot afford to lose.
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