Commodities in Your Portfolio
Commodities – energy and metals – often move differently from stocks and bonds; some investors therefore hold a small allocation for diversification.
The front-month futures on Alysly:
- Energy: WTI crude , Brent , gasoline , heating oil
- Industrial metal: copper – a classic economic barometer
Why They Move Differently
A share is a claim on future profits; a barrel of oil is a physical good that has to be produced, shipped and stored. Prices react to weather, outages, sanctions, transport bottlenecks and the business cycle – events that have little to do with corporate earnings. In 2022, energy prices rose sharply while both stocks and bonds fell, one of the rare years in which the classic mix offered no shelter.
WTI and Brent are two different benchmarks. WTI is priced inland in the United States, Brent is the seaborne North Sea grade that most of the world prices against. Gasoline and heating oil are refined products; their margin over crude moves on its own.
Futures and the Roll: The Chart Is Not the Return
The prices here come from the front-month futures contract. An investment in commodities rarely earns exactly that price change, because the position has to be rolled into the next contract before expiry. If the next contract is more expensive (contango), the roll costs money; if it is cheaper (backwardation), it pays. Over a year this difference can outweigh the price move itself.
On the roll date there is therefore a price gap between the old and the new contract that no trader experienced as a price move. Our series are chained backwards at that point: every daily change is the change of a single contract, and the latest value is the actual settlement price.
How Commodities Are Traded in Europe
UCITS funds must diversify, so a fund that holds nothing but oil or gold is not possible in that wrapper. Single commodities are therefore usually held through ETCs – debt securities issued against the commodity, often physically backed for precious metals, which adds issuer risk to price risk. Broad commodity indices are available as UCITS ETFs, typically built with swaps.
What Applies
- Commodities pay no dividend or interest – the return is the price change alone, less roll costs.
- They are often highly volatile and can go nowhere for years; in portfolios they therefore usually make up only a small share.
- In some periods they outpaced inflation , in others they did not – see also gold .
- Tax treatment depends on the wrapper (ETC, ETF, certificate), not on the commodity.
Check It Yourself
A commodity can be set next to an equity index in the comparison tool ; correlations show how closely they actually move together, and the backtest runs an allocation.
Information only, not investment advice.