A commodity index tracks the performance of specific bulk goods or raw materials. Commodity indexes may measure the price of a physical basket of commodities, but many indexes are based on the prices of futures contracts currently trading on an organized commodity market.
The value of a commodity index fluctuates based on the performance of its underlying products or instruments, such as agricultural products, precious metals or currencies. Different indexes have various ways of categorizing commodities, and some indexes are weighted so that the most valuable materials have the greatest impact.
Individual and institutional investors can purchase shares in commodity funds that seek to replicate the performance of specific commodity indexes, just as they can purchase index funds and ETFs that track securities indexes.
A primary attraction of commodity funds is that they enable investors to enter the commodities market without directly purchasing physical commodities or futures contracts.