Sectoral index
Also written Sectoral commodity index · Sectoral indices
A commodity index built from the futures of a single segment — bullion, base metals, energy or the guar family — with fixed annual weights and no 30 per cent cap per constituent.
In plain language
A composite commodity index covers several segments: energy, metals, bullion and sometimes farm goods. A sectoral index picks one segment and tracks only that.
The workbook gives Indian examples. NCDEX GUAREX tracks the guar family. MCX has three: BULLDEX for precious metals, METALDEX for base metals and the iCOMDEX Energy Index.
A sectoral index covers only a few commodities. So it gives a more direct read on one part of the market. It also has two uses. You can hedge a basket of related inputs with it. Or you can trade a view on a whole sector, without picking single contracts.
How it works
Built from futures, not spot. Indian commodity indices use the prices of the nearby futures contracts of their constituents, following SEBI's circular of 18 June 2019. They are therefore treated as total return indices.
Weights are fixed for the year. Commodity indices are price-based: once weights are set they stay constant until the annual rebalancing (calendar year at NCDEX and MCX), unless a constituent's derivatives trading stops. Weights come from a production value score and a liquidity value score, neither below 25 per cent (MCX currently 25:75).
The cap that does not apply. In a composite index each constituent must be between 1 and 30 per cent. No such cap applies to a sectoral index.
2025 weights (from January 2025):
| Index | Constituents |
|---|---|
| MCX iCOMDEX Bullion | Gold 60.119248%, Silver 39.880752% |
| MCX iCOMDEX Base Metal | Aluminium 30%, Copper 40%, Lead 4%, Zinc 26% |
| MCX iCOMDEX Energy | Crude oil about 49.85%, Natural gas about 50.15% |
| NCDEX GUAREX (2022-23) | Guar seed 59.35%, Guar gum 40.65% |
Uses. A construction company can hedge its natural short in metals by buying metal index futures. A wholesale dealer in bullion or metal can short the relevant sectoral index futures. The workbook adds that a sectoral index can act, to some extent, as a proxy for inflation in that family of commodities.
A worked example
How a fixed-weight index moves. Over a month, gold futures rise 5 per cent and silver futures fall 2 per cent (illustrative moves). Using the 2025 MCX Bullion weights:
Index change ≈ 0.60119 x 5% + 0.39881 x (-2%)
≈ 3.006% - 0.798%
≈ 2.21%
The weights do not drift with the prices during the year. Contrast an equity index, where a stock that rises also gains weight.
Why no 30 per cent cap. Gold alone is about 60 per cent of the Bullion index and silver about 40 per cent. Under the composite-index rule, neither weight would be allowed — which is exactly why the cap is limited to composite indices. A two-commodity sector cannot be built otherwise.
A hedge. A builder needs aluminium, copper and zinc over the next quarter and fears prices will rise. Instead of three futures positions, he buys MCX Base Metal index futures. The index is 30 / 40 / 26 per cent in those three metals, with 4 per cent lead, so the hedge is close but not exact: if his own usage were, say, half copper, he would be under-hedged on copper. That mismatch is the price of hedging with a basket.
Why NISM asks about it
Chapter 2 (Commodity Indices): section 2.2 names the Indian composite and sectoral indices, section 2.3 sets out the SEBI construction rules including the composite-only 1-30 per cent band, and the constituent weights follow; section 2.5 and Chapter 5, section 5.8, cover the hedging uses. Expect "which of these is a sectoral index?", the absence of the 30 per cent cap, and why commodity indices are price-based.
Common exam traps
- The 1-30 per cent per-constituent band applies to composite indices only. Sectoral indices have no such cap.
- Commodity indices use futures prices, not spot prices, under SEBI's 18 June 2019 circular.
- Weights are fixed for the year; commodity indices are price-based. The workbook contrasts this with equity indices, which it calls "volume-based" because weights change with market capitalisation.
- iCOMDEX Composite is the composite index; BULLDEX, METALDEX and GUAREX are sectoral.
- The workbook is inconsistent on the base metal index's name — "MCX METALDEX", "MCX METLDEX" and "MCX iCOMDEX Base Metal Index" all refer to it. Aluminium, copper, lead and zinc are its constituents; the list at one point also mentions nickel.
- Weights change year to year. The Bullion weights were 59.425496 / 40.574504 per cent in 2024 and the Energy weights about 54 / 46 per cent; use the year the question states.
Check yourself
1.In a composite commodity index, the weight of each constituent must lie between:
- a)A minimum of 1% and a maximum of 30%
- b)A minimum of 2% and a maximum of 40%
- c)A minimum of 5% and a maximum of 25%
- d)A minimum of 1% and a maximum of 15%
Show the answer
Answer: (a) A minimum of 1% and a maximum of 30%
In a composite index, each constituent has a minimum weight of 1% and maximum weight of 30% — and crucially, there is no such cap in the case of a sectoral index.
That exemption is what allows gold to hold 60.119248 percent of MCX BULLDEX, a bullion sectoral index, in 2025. Reading the 30 percent cap as universal is the commonest error in this chapter.
Option (b) describes what MCX has chosen for iCOMDEX — weights of 2% to 30% with a sectoral level cap of 40%. Exchanges may fix their own limits within the SEBI band, so MCX's narrower floor is an exchange choice, not the regulatory requirement the question asks about.
Option (d)'s 15% is the separate liquidity cap applied to a commodity that fails the ADTV test.
Where this is taught
- Series XVI · Chapter 2: Commodity Indicesintroduced here
- Series XXI-B · Chapter 12: Introduction to Indicesintroduced here
- Series XIX-E · Chapter 8: Indices and Benchmarkingintroduced here
Related terms
- HedgingTaking a derivative position that moves opposite to an exposure you already have, so gains on one offset losses on the other and the future rate is locked in at a known level.
- Cost of carryThe cost of holding an asset until a future date — financing interest plus storage, less any income it pays. It links spot to futures: fair futures price = spot + cost of carry − inflows.
- Average Daily Trading VolumeThe liquidity test a commodity future must pass before its price may carry weight in a tradeable commodity index — Rs 75 crore a day for agri, Rs 500 crore for non-agri.
- Composite indexA commodity index spanning several segments — energy, metals, bullion — whose constituents must each weigh 1 to 30 per cent, with at least 80 per cent of the weight in sufficiently liquid futures.
- Price-based indexAn index whose constituent weights stay fixed for the year, so the level moves only when prices move — how every Indian commodity index works, as against volume-based equity indices.
- Style indexAn index of value stocks (low P/E, low P/B, high dividend yield) or growth stocks (the reverse), built to benchmark style managers — with far higher turnover than broad market indices.
- AGRIDEXNCDEX's agricultural commodity index, weighted across ten crops by production and liquidity — discontinued from 1 February 2022 after several of its constituent commodities stopped trading.
- BULLDEXMCX's sectoral index tracking sentiment in the precious metals segment, currently weighted roughly 60% gold and 40% silver, based on futures prices rather than spot.
- CPMI-IOSCOThe joint global standard, from two international regulator bodies, that Indian commodity index futures and options risk management frameworks must conform to — behind the 99% VaR and 2-day margin period rules.
- Excess return indexAn index measuring an investment's performance purely against a benchmark or risk-free rate, without counting any income the underlying generates — the flip side of a total return index, which counts both.
- Cross margin benefitA margin offset of up to 75% for a client holding opposite positions in index futures and futures on that index's own constituents, similar to the crush margin benefit, allowed by SEBI's circular of 29 June 2021.
- Roll yieldThe gain or loss from rolling an expiring futures position into the next contract month, over and above the pure cost of carry.
- Spread tradeA paired buy-and-sell trade across two related futures contracts, such as a calendar spread, which exchanges exclude from index price computation as it is not a bonafide single-side trade.
- Three-month disclosure ruleThe requirement that a proposed rebalanced commodity index — its new weights and constituents — be publicly disclosed at least three months before the exchange starts publishing the index on those new weights.
- Volume-based indexAn index whose weights shift daily with market value, the way equity indices work — unlike commodity indices, which fix weights for a year at a time.
- GUAREXNCDEX's sectoral commodity index on the guar family, with only two constituents — guar seed at 59.35% and guar gum at 40.65% for the year 2022-23.
- Law of averagesThe averaging effect that makes a commodity index less volatile than its constituents — useful diversification for a hedger, and the workbook's main explanation for why index derivatives stay illiquid in India.
- Liquidity valueOne of the two scores that fix a commodity's weight in an Indian commodity index — the average trading volume of its futures over the last 12 months.
- Maximum tenorThe 12-month ceiling on a commodity index derivative — an index futures contract may not run longer than 12 months, and index options are permitted up to 12 months of expiry.
- METALDEXMCX's base metal sectoral index — for 2025, copper 40%, aluminium 30%, zinc 26% and lead 4% — which the workbook also reads as a rough inflation gauge for the metals family.
- Monsoon proxyUsing an agricultural commodity index future as a stand-in for a bet on the monsoon — buy it for a deficit monsoon, short it for a good one — which the workbook offers as an approximation only.
- Production valueOne of the two scores that fix a commodity's index weight — the average value of deliverable supply over the past five financial years, where deliverable supply is production plus import.