Commodities never belonged in your portfolio


Earlier this year, strategists and investors came in droves to embrace commodities to weather soaring inflation. It looked like a brilliant move at first as oil, metals and grains all rallied, but investors who have held onto those positions are seeing their gains largely eviscerated by a sharp pullback. In reality, most individual investors had no business investing in commodities.

Commodities can make great trades, but they are often bad investments. Unless you have your own warehouse, you incur a cost to store them, which means it’s hard to make money keeping them long term. If investors peak in search of fad portfolio construction techniques, returns can be much worse.

The Bloomberg Commodities index is a good illustration of this. On a one-time basis, it’s grown 351% over the past two decades, a respectable compound annual growth rate of 7.8% that’s slightly lower than the S&P 500 index’s 9.3%. is not what investors earn when investing through financial instruments, as this does not take into account the rolling cost of these futures contracts. Among other things, there is a considerable cost associated with storing barrels of crude oil, reservoirs of natural gas and bushels of wheat. Partly because of these additional costs, the total return version of the same index – based on financial instruments that track commodities – has risen only 50% over the same period (a meager annual growth rate composed of 2%).

Perhaps as importantly, it is now down 14% from April, when fashionable commodity allocations took off to chase soaring energy and wheat prices following the invasion of Ukraine by Russia. A survey of fund managers at Bank of America Corp. for April showed investors were the sharpest net overweight on commodities that month. Even after last month’s outflows, the Invesco Optimum Yield Diversified Commodity Strategy ETF remains one of the top 50 exchange-traded funds in the United States by 2022.

Modern investors tend to fall back on the idea that diversification goes hand in hand with responsible investing, and they tend to assume that it’s good to own as many asset classes as possible. It really depends on the time horizon of the investor, though, and it can be a wild ride for working-age people with decades to invest if portfolio diversifiers are dampening returns. To borrow a phrase from Universa Investments founder Mark Spitznagel, the diversification cure built into many modern risk mitigation techniques is worse than the disease. I would say that the logic extends to raw materials.

Consider the performance of different asset classes over long periods: the S&P 500 has risen 493% over the past 20 years, while Treasuries have gained 87% versus 50% for commodities. If you had the time and the stomach for volatility, it paid off to just own stocks. In other words, well-intentioned risk management may indeed smooth out single-year returns, but the same strategies may be such a drag on long-term performance that they may not be worth it.

It’s no surprise that the market found itself grabbing the straws earlier this year and eventually landed on commodities. The economy, of course, is going through a period not seen since the inflationary 1970s, and tricks that seemed to work in the recent past have clearly lost their magic.

Oil, wheat and gold bullion made as much sense as anything else if the economy was truly heading into an era of stagflation, but that doesn’t seem to be the base case at this point. Federal Reserve Chairman Jerome Powell said he was committed to raising interest rates until inflation cracks and global growth wanes rapidly, meaning the behemoths industrial metals from the start of the year are collapsing as fast as they rose. The slowdown in China, which drove the last commodities supercycle, is part of that.

Clearly, the economy is in a strange place with a host of confusing cross-currents. A strong labor market continues to belie other signs of strain and – who knows? – perhaps oil, copper and other commodities could still hit their highs. Those commodity allocations investors hoarded earlier this year could still pay off big. But even if they do, they will be seen as a well-timed trade, not a reliable strategy. Commodities are likely never to be a good long-term investment.

More other writers at Bloomberg Opinion:

• The Goldilocks era of Private Equity is coming to an end: Nir Kaissar

• Are you anxious about the recession? Think Like a Freelancer: Erin Lowry

• Now what? Tips for retiring in a recession: Teresa Ghilarducci

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

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