Commodities in your portfolio

Commodities are raw materials — oil, natural gas, copper, wheat, corn, cattle. You can gain exposure through futures-based ETFs, commodity producer stocks, or broad commodity index funds. The case for owning them is nuanced: they provide inflation protection and diversification, but with significant drag in non-inflationary periods.

The diversification case

Commodities have historically low correlation with stocks AND bonds, which makes them a useful portfolio diversifier during specific environments — most notably, high and rising inflation. In 2022, when stocks and bonds both fell, commodities surged. Having even 5% in commodities meaningfully reduced portfolio pain that year.

The drag problem

Commodity futures suffer from 'contango' — where the futures price is higher than the spot price — which creates a persistent roll cost that eats into returns. Over long periods in normal inflation environments, a broad commodities fund tends to return near zero after inflation. You're paying for insurance that only pays off in specific environments.

The practical answer

Most portfolios don't need commodities. If you want them: 5% in a broad commodities index fund (DJP, PDBC, or GSG) is a reasonable allocation. Use it as an inflation hedge, not a growth engine. Rebalance into it when it's down (after inflationary periods cool) and trim it when it's up (after a spike). And don't touch leveraged commodity products — they decay rapidly and are designed to lose money for holders.