I was reading Larry Swedroe’s The Only Guide to Alternative Investments You’ll Ever Need the other day, I have been thinking about adding commodities to my portfolio. No, I am not going to go out and buy a futures contract; however, I have been thinking about adding commodities to my investment portfolio as part of my asset allocation strategy. Commodities have been taking significant hit this year as evident by QRAAX (represents the S&P GSCI index) and by PCRIX (represents the DJ-AIGCI index).
What are Commodities
Commodities comprise a broad category of raw materials used by industries and traded on specialist commodities markets that include energy (e.g., natural gas and oil-related commodities), industrial metals (e.g., copper, aluminum, lead, nickel, and zinc), precious metal (e.g., gold and silver), agriculture (e.g., wheat, corn, soybeans, cotton, sugar, coffee, and cocoa), and livestock (e.g., cattle and hogs).
The two indices representing commodities are represented by QRAAX and PCRIX:
Why You Should Invest in Commodities
Commodities are a source of inflation and thus provide a strong hedge against it. Commodities also convey substantial diversification benefits due to its negative correlations to both stocks and bonds. In short, adding a small amount of commodities, say 5%, can improve your overall portfolio in several ways; specifically, better overall performance due to diversification and lower risks.
How to Invest in Commodities
There are several ways to gain exposure to commodities without the complexities of futures trading. As mentioned earlier there are mutual funds, such as QRAAX and PCRIX that tracks the S&P GSCI and DJ-AIGCI, respectively. Unfortunately, QRAAX has a fairly steep expense ratio of 1.37% and PCRIX has a prohibitive minimum initial investment figure. Other options include commodity-related Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs). Here are a few that’s worth looking into:
- GSG – iShares S&P GSCI Commodity-Indexed (ETF)
- DJP – Dow Jones-AIG Commodity Index Total Return (ETN)
Here’s a comprehensive list of commodity ETFs and ETNs.
Obviously, investing in commodities is not without risk and it’s not atypical for commodities to underperform for an extended period of time. Additionally, as you diversify your portfolio, it will become harder to track your performance against standards like the S&P 500, which may add a new level of anxiety.
Do you currently invest in commodities? Could you share your thought with us?
Reviewed and updated May 13, 2011.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.