Comparing commodity indexes throws up useful factors in taking into account fundamentals of the futures markets

An analysis of commodity indexes shows third-generation indexes accurately take into account the fundamentals of commodity futures markets by going long backwardated assets and short contangoed ones.

The rising interest of institutional investors for commodities since the early 2000s prompted remarkable financial engineering in the commodity index space which is now in its third generation. Broadly speaking, first-generation commodity indexes are long-only and do not pay much attention to the fundamentals of backwardation¹ and contango.

The second-generation indexes are also long-only but attempt to lessen the negative blow on performance of contango while exploiting backwardation. The third