SDCI Methodology

SummerHaven Dynamic Commodity Index^sm (“SDCI”)

SDCI INDEX METHODOLOGY

SDCI – INDEX PHILOSOPHY

The SummerHaven Dynamic Commodity Index (“SDCI”) was developed by SummerHaven Index Management to provide an active commodity index benchmark for investors. The SDCI is based on the notion that commodities with low inventories will tend to outperform commodities with high inventories, and that priced-based measures, such as futures basis, can be used to help assess the current state of commodity inventories¹.

SDCI – INDEX CONSTRUCTION

The SDCI selects 14 commodity contracts with equal weighting from a universe of 27 eligible commodities each month through three steps:

STEP 1: Commodity Selection – Backwardation

Choose 14 commodities with the greatest backwardation (or least contango). Backwardation is measured as the annualized % price difference between the futures price for the closest-to-expiration contract and the next closest-to-expiration contract for each commodity.

STEP 2: COMMODITY SELECTION – DIVERSIFICATION

SDCI requires at least one component from each of the four commodity sectors: Precious Metals, Industrial Metals, Petroleum, and Grains. If a sector isn’t represented after selecting the 14 commodities, the commodity with the highest backwardation among the commodities of the omitted sector is substituted for the commodity with the lowest backwardation among the 14 selected commodities.

STEP 3: Contract Month Selection

For each of the 14 index commodities, SDCI selects the contract month with the greatest backwardation (or least contango), taking into account the allowed contracts and maximum tenor for each commodity market.

The maximum eligible tenor is measured as the number of months starting from the maturity of the closest-to-expiration contract. The previous not withstanding, the contract expiration is not changed for that month if a commodity remains in the index, as long as the contract does not enter expiry or enter its notice period in the subsequent month.

SDCI TOTAL RETURN CALCULATION:

The overall return on the SDCI is generated by two components: (i) uncollateralized returns from the Benchmark Component Futures Contracts comprising the SDCI and (ii) a daily fixed income return reflecting the interest earned on a hypothetical 3-month U.S. Treasury Bill collateral portfolio, calculated using the weekly auction rate for the 3-Month U.S. Treasury Bills published by the U.S. Department of the Treasury.

SDCI Rebalancing:

Price observations for the steps described above are taken on the fifth-to-last business day of each month. SDCI rebalancing takes place during the last four business days of the month. At the end of each of these days one fourth of the prior month portfolio positions are replaced by an equally-weighted position in the commodity contracts determined on the selection date. At the end of the rebalancing period, the SDCI targets an equal-weight position of approximately 7.14% in each of the selected commodity contracts.

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¹ Geert Rouwenhorst, SummerHaven partner and Yale professor, is a recognized leader for his academic research linking commodity futures returns to inventories:
See “The Fundamentals of Commodity Futures Returns” Review of Finance (2013), pp. 35-105.