Like Jim Wiandt and the other index purists on this site, Dave, you’re missing the key point regarding commodities.

While we strongly agree that there is no one “right” approach to commodities, we differ in that I think there is a “wrong” approach.

My argument about commodities always comes down to this: The commodity markets are different from stocks and bonds.

The stock and bond markets exist for the purposes of investment. Companies use them to raise money and investors use them to search out high returns.

Commodity markets exist for many reasons, but the primary one is to provide price insurance. Producers of commodities are able to hedge price risk by selling forward supply at fixed prices. Purchasers of commodities are able to hedge price risk by buying forward supply at fixed prices. There will be at any time an imbalance between these two forces, which, combined with available inventories, will cause commodities to trade either in backwardation or contango.

What this means is that the traditional justifications used to support market-cap-weighted equity indexes do not apply to commodity markets.

In the equity markets, people debate whether fundamental indexing, small/value tilts and other strategies are a “better” way to invest than market-cap-weighted indexes. But there is a strong theoretical argument to make that stock prices reflect the best available guess of a company’s value, and therefore, buying a market-cap-weighted portfolio makes sense.

In commodities, there is no such justification. But the current generation of mainline indexes was built around the premise of taking what we know about stock indexing and applying it to commodities.

That, to my mind, is silly. And that is why I find this new approach so interesting.