The Case for Investing in Broad Commodities

OpinioPro Selection
By November 25, 2021 15:23

The Case for Investing in Broad Commodities

Building Stronger Portfolios

Despite being traded on exchanges for more than a century, commodities are the least well understood of the main asset classes. Over the last 20 years, this gap has begun to close, with many renowned academics pointing out that commodities, or more precisely commodity futures contracts, should become a staple component in long-term strategic asset allocations. Firstly, commodity futures contracts pay a risk premium above inflation over the long term. Academics have demonstrated this many times over, making the asset class a clear candidate to consider for inclusion in a multi-asset portfolio. Furthermore, commodities can add value to any strategy through their unique attributes:

  • Adding to the potential long-term performance thanks to the risk premium.
  • Providing diversification from equities, as shown in Figure 8 and Figure 9.
  • Providing diversification during early recessions and late expansions, as shown in Figure 14.
  • Acting as an inflation hedge, including in markets where inflation jumps unexpectedly, which is not the case for other assets as outlined in Figure 17.
  • Benefitting from US dollar weakness. In most five-year periods, their correlation is negative, as shown in Figure 22.

OpinioPro Selection
By November 25, 2021 15:23

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