The Bank of America Merrill Lynch Commodity index eXtra (MLCX) is a rule-driven commodity index where commodity contracts are initially selected by liquidity and then weighted by the importance of each commodity in the global economy, with particular emphasis on downstream commodities. Different to other commodity indices, the MLCX has a semi-continuous contract rolling schedule.

MLCX can increase returns by rolling semi-continuously

Instead of rolling a basket of commodity futures contracts in a conventional front to second-month roll schedule over a five-day window, the MLCX is designed to roll semi-continuously. The MLCX rolls over a 15-day window from a second to third-month futures contract from the first through the fifteenth business day of the month. The back-testing of data suggests that index performance would have improved by 3.3% per annum on the basis of a 15-day window second-to-third month roll schedule compared to the more conventional five day-window front-to second month roll schedule.

MLCX provides more exposure to downstream commodities

The MLCX is devised to present an accurate representation of the value of commodities in the global economy. However, the share of any given sub-index has a cap of 60% and a floor of 3% in the overall index to control for risk. Also, the MLCX differentiates between intermediate and final commodities, adjusting for double-counting to assign proportional weights to upstream commodities. For instance, the MLCX provides a slightly higher exposure than other commodity indices to downstream commodities such as gasoline or live cattle. Broadly, we find that many downstream commodities tend to experience faster spot-price appreciation and/or higher roll yields than the upstream commodities over very long periods of time.

MLCX offers TR, ER and Spot indices and seven sub-indices

MLCX is presented in three formats: a Spot Return index (MLCX SP) that tracks the price movements of the underlying commodity futures, an Excess Return index (MLCX ER) that factors in both price movements as well as roll yields, and a Total Return index (MLCX TR) that includes commodity price movements, a roll return component, and a T-bill return component to measure a fully collateralized commodity futures investment. In addition, the MLCX offers seven sub-indices including the MLCX Energy, MLCX Industrial Metals, MLCX Precious Metals, MLCX Grains & Oilseeds, MLCX Soft Commodities, MLCX Livestock, and finally MLCX Agriculture, which is a combination of the last three sub-indices.