Is Commodity Index Investing Profitable?

Using a comprehensive dataset of first-, second-, and third-generation commodity indices, we investigate the potential diversification benefits in equity-bond portfolios. The results show that first-generation commodity indices are outperformed by enhanced indices. Second-generation indices provide slightly increased portfolio Sharpe ratios but at the same time they are spanned by benchmark assets. For third-generation commodity indices, the mean-variance spanning hypothesis is rejected but they show heterogenous out-of-sample performances. We thus present new evidence showing that the performance of the third-generation of commodity indices is less clear-cut than found in existing studies.