Commodities may offer a diversification benefit in investment portfolios. Here we look at how to invest in commodities broadly with the best commodities ETFs and why it may not be a great idea.

// TIMESTAMPS:

00:00 - Intro: Why Commodities ETFs?
01:02 - PDBC
01:45 - COMT
02:17 - BCI
02:58 - Should You Invest in Commodities?
07:24 - Outro

// SUMMARY:

Commodities – metals, energy, livestock, and agriculture – offer what’s called an uncorrelation to the stock market, meaning the movement of one does not follow the other. Further, commodities sometimes move in the opposite direction (negative correlation) of stocks, providing a diversification benefit in one’s investment portfolio, particularly during periods of market turmoil and unexpected inflation. This property makes Commodities more attractive to retirees and those with a low risk tolerance aiming to reduce portfolio volatility and risk.

But should you invest in commodities? Probably not.

Again, commodities are physical assets like gold, oil, copper, livestock, coffee, agriculture, etc. Their value depends on their usage in production, and is directly related to supply and demand. Any position in commodities is therefore a speculative bet on the short-term future, rather than long-term growth associated with stocks, bonds, real estate, etc.

Unfortunately, commodities themselves are unpredictable by their very nature. Crops go bad. The weather changes. Macroeconomic policies shift. Alternatives to things like copper are found. Ownership, storage, and transportation of commodities increase costs.

Stock ownership is a claim on a company’s future earnings. A bond is a contractual obligation between a lender and a borrower. Ownership of a commodity is not value-producing; it involves no earnings or cash flow and is simply a bet on production and/or consumption at that time. A ton of copper will still be a ton of copper 10 years from now, and it pays no dividends or interest.

Cash flow drives returns. Think of owning a commodities fund as just paying for their storage somewhere. With technological advances, we would expect commodity prices to fall or stay flat over the long term.

Essentially, even in inflationary environments, investors have historically been better off over the long term holding just about anything other than commodities. And we now have assets like REITs, TIPS, etc. as alternatives. Commodities may offer a tiny diversification benefit to lower volatility and risk, but we still want our diversifiers to have positive future expected returns. Moreover, commodities tend to become much more correlated with stocks at precisely the time we want to rely on them – during stock crashes.

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#investing #inflation #commodities #stocks #stockmarket

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