Commodities: The Portfolio Hedge

Commodities are used to diversify a portfolio and protect against inflation. These assets—ranging from agricultural products and metals to energy resources—typically increase in value when inflation rises, providing protection when most other investments struggle.

As prices for goods and services rises during inflationary periods, so do the prices of the raw materials required to produce them. This intrinsic connection to the real economy can make commodities worthwhile for a well-balanced portfolio.

What Are Commodities?

Commodities are goods that are more or less uniform in quality and utility regardless of their source. For instance, when shoppers buy an ear of corn or a bag of wheat flour at a supermarket, most don’t pay much attention to where they were grown or milled. Commodities are commonly broken down as follows:

Why Commodities Can Be a Portfolio Hedge

A major benefit of investing in commodities is their tendency to move independently of stocks and bonds. This low or even negative correlation helps diversify a portfolio.

Commodities consistently show low correlation with traditional investments. Correlation is measured on a scale from -1 (perfectly negative) to +1 (perfectly positive). Below, you can see correlations among major assets over a long period.

What this means is that when stocks or bonds are dropping, commodities sometimes follow a different path, even gaining value when stocks are declining.

Performance During Market Stress

While past performance doesn’t guarantee future results, historical data shows that commodities often outperform typical portfolio assets during periods of market stress, particularly when inflation is involved:

• During the 2021—to-2022 inflation surge, the Bloomberg Commodity Index made big gains while stocks and bonds declined: the Bloomberg Aggregate Bond Index dropped 13.02% in 2022, while the S&P 500 fell 19.44%.
• During the stagflation of the 1970s, commodities delivered positive real returns while stocks and bonds lost purchasing power.
• Even during regular economic cycles, commodities often provide positive returns when transitioning between different economic phases of growth and contraction.

Inflation Protection

Unlike bonds, which typically lose value during periods of rising inflation, and unlike many stocks, which can struggle when production costs are rising, commodities are intrinsically linked to inflation. Here’s how they help a portfolio in this regard:

• Direct relationship: Many commodities are the raw materials whose price is rising, thus contributing to inflation.
• Store of value: Precious metals, especially, provide tangible assets that maintain value when the purchasing power of the dollar declines.
• Hedge against dollar depreciation: Globally, most commodities are priced in U.S. dollars. When the dollar weakens, commodities become less expensive for foreign buyers, potentially increasing demand and driving prices higher. This makes commodities an effective hedge against dollar depreciation for U.S. investors.

Economic Cycle Shifts

Commodities vary in how they respond to various stages of the economic cycle:

• Expansion: Industrial metals (copper, aluminum) and energy often outperform.
• Peak: Agricultural commodities frequently excel as inflation expectations rise.
• Contraction: Precious metals (gold, silver) typically provide downside protection.
• Recovery: Base metals and energy usually lead as economic activity rebounds.

Risk and Return Profile

Here are examples of ways to allocate to commodities in your portfolio:

• Conservative (3% to 5%): Focus on gold ETFs and blue-chip commodity producers.
• Moderate (5% to 10%): Mix of broad-based commodity ETFs and sector-specific exposures.
• Aggressive (10% to 15%): Futures, commodity-focused ETFs, and growth-oriented producers.

Before making any allocation, it’s important to understand the risks involved in commodity investing:

• Higher volatility: Commodities typically have higher standard deviation (a measure of risk) than stocks or bonds.
• Cyclical performance: Returns can vary dramatically based on economic conditions.

How To Invest in Commodities To Hedge Your Portfolio

There are four ways to gain exposure to commodities:

1. Invest directly in the commodity.
2. Use commodity futures contracts.
3. Buy shares of ETFs that specialize in commodities.
4. Buy shares of stock in companies that produce commodities.

Direct Investment

Investing directly in a commodity requires acquiring and storing it. Selling a commodity means finding a buyer and handling delivery. This might be doable for metal commodities and bars or coins, but bushels of corn or barrels of crude oil are out of the question for most people.

Commodity Futures

Most commodity futures contracts require the investor to buy or sell a certain amount of a given commodity at a specific time at a given price. To trade futures, investors typically require a margin brokerage account or a stockbroker that offers futures trading services.

If the price of a commodity rises after a contract is sold, the value of the buyer’s contract goes up. Conversely, when the price of a commodity goes down, the seller of the futures contract profits at the expense of the buyer.

Previously, futures contracts were designed only for major traders and hedgers in their respective commodity industries. For example, one standard gold futures contract is for 100 troy ounces of gold, which as of late May 2025 would be worth $330,000, more exposure than the average investor wants.

However, many new contracts are designed to be more accessible to retail investors. For example, CME Group offers a 1-ounce gold futures contract worth about $3,300, with a margin requirement of only $150.

Commodity ETFs

Many retail investors choose ETFs to gain exposure to commodities. Some commodity ETFs buy the physical commodities and then offer shares to investors that represent a certain amount of a particular good. Below, we’ve broken down examples among different types of commodity ETFs.

Broad-Based Commodity ETFs:

• Invesco DB Commodity Index Tracking Fund (DBC): Tracks a diversified index of 14 commodities with a focus on energy.
• iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT): Uses a “rolling” strategy to minimize the negative impact of contango in futures markets.
• Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (BCI): Offers exposure to 20-plus commodities without issuing K-1 tax forms.

Broad Sector ETFs:

• VanEck Vectors Gold Miners ETF (GDX): Exposure to global gold mining companies.
• SPDR S&P Metals & Mining ETF (XME): Covers diverse metals and mining companies.
• VanEck Vectors Agribusiness ETF (MOO): Focuses on agricultural companies.

Specific Commodity ETFs:

• SPDR Gold Shares (GLD): The largest physically-backed gold ETF.
• United States Oil Fund (USO): Tracks West Texas Intermediate crude oil prices.
• Teucrium Corn Fund (CORN): Holds a portfolio of corn futures.
• iShares Silver Trust (SLV): Backed by physical silver held in London vaults.

Commodity Producer Stocks

Investors often buy shares of companies that produce commodities as a way to gain exposure to the commodity. But note that a company’s share price will not necessarily track the price of the commodity it produces.

Energy:

• Integrated multinationals: ExxonMobil (XOM), Chevron Corp. (CVX), BP plc (BP)
• Exploration and production: ConocoPhillips (COP), EOG Resources Inc. (EOG)
• Oil services: Schlumberger N.V. (SLB), Halliburton (HAL)

Metals and Mining:

• Diversified firms: BHP Group Limited (BHP), Rio Tinto plc (RIO)
• Gold miners: Newmont Corporation (NEM), Franco-Nevada Corporation (FNV)
• Copper producers: Freeport-McMoRan Inc. (FCX), Southern Copper Corporation (SCCO)

Agriculture:

• Agricultural processors: Archer-Daniels-Midland Company (ADM)
• Farm equipment: Deere & Company (DE), AGCO Corporation (AGCO)
• Fertilizer companies: Nutrien (NTR), Mosaic Company (MOS)

The Bottom Line

While commodities often undergo significant volatility, their low correlation with stocks and bonds means they often do well precisely when traditional investments struggle. This counterbalancing effect makes them particularly valuable during economically difficult periods and when there’s inflation or geopolitical uncertainty.