For many investors, commodities remain one of the few major asset classes missing from their portfolios. Unlike equities, which generate earnings growth, or bonds, which provide income, commodities can appear more complex, cyclical, and prone to the ups and downs of the business cycle.
Yet in today's environment of elevated inflation uncertainty, geopolitical fragmentation, the energy transition, and growing concerns about the reliability of traditional stock-bond diversification, we believe the case for commodities deserves renewed consideration.
In this note, we look at four questions covering the potential role of commodities in a wider, diversified portfolio and how holding commodities may help investors achieve their financial goals. For our specific commodity preferences, please see our Messages in Focus.
What can commodities bring to a portfolio?
The strongest investment case for commodities is diversification. Unlike equities and bonds, commodity returns are largely driven by physical supply and demand dynamics, inventory levels, production constraints, and economic activity. As a result, commodities have historically exhibited relatively low return correlations with traditional financial assets.
This diversification becomes especially valuable during periods when stocks and bonds move in the same direction. For much of the past two decades, investors benefited from negative stock-bond correlations. Yet when inflation is elevated, both asset classes can come under pressure simultaneously. In those environments, commodities have historically provided a valuable source of diversification because their return drivers are fundamentally different. Between 1990 and 2024, replacing 10% of a 60/40 portfolio with commodities (UBS CMCI Total Return Index) would have increased annualized returns from 6.6% to 6.8%, reduced volatility from 9.2% to 8.8%, and lifted the Sharpe ratio (a measure of risk-adjusted returns, where higher is better) from 0.36 to 0.39, based on UBS and Bloomberg data.
Commodities also offer one of the clearest inflation hedges available to investors. Energy and food are embedded directly within inflation measures, meaning commodity prices often rise alongside inflationary pressures. Historical analysis shows that broad commodities have delivered particularly strong performance during periods when inflation exceeds market expectations.
The strategic backdrop is also supportive. Long-term themes—including underinvestment in resource production, electrification, decarbonization, strategic resource security (energy, critical minerals), and climate-related supply challenges—are reshaping commodity markets. These structural trends can create opportunities that differ meaningfully from those available in stocks and bonds.
For all their potential merits, investors should not think of commodities as a loss-limitation tool. While certain commodities, such as gold, can provide resilience during periods of market stress, the evidence suggests that the most consistent long-term benefits come from diversification and inflation sensitivity rather than crisis protection. And of course, past performance is no guarantee of future results.
How much should investors hold in commodities?
There is no universal answer to the allocation question. The optimal exposure depends on an investor's objectives, risk tolerance, existing portfolio composition, and macroeconomic outlook.
That said, our research suggests that for many investors, a low- to mid-single-digit allocation represents a reasonable strategic starting point. Such an allocation is large enough to improve diversification and add inflation sensitivity while remaining small enough to limit the impact of commodity market volatility on overall portfolio outcomes.
Commodities can experience prolonged periods of underperformance relative to equities and bonds. Investors therefore need an allocation they can realistically maintain through different market regimes.
From which assets should investors fund commodities?
The potential benefits of commodities depend not only on how much investors allocate, but also on how they fund it.
Historical analysis suggests that funding commodities with approximately one-third from equities (S&P 500) and two-thirds from bonds (Bloomberg US Aggregate) has tended to leave overall portfolio volatility broadly unchanged. We believe this approach preserves more return potential than a purely proportional reduction across asset classes while allowing commodities to provide diversification benefits.
However, the most appropriate funding source ultimately depends on the investor's objectives.
Investors who are primarily concerned about inflation may wish to fund commodity exposure predominantly from bonds. Inflation typically creates challenges for fixed income, while commodities often benefit from it.
Conversely, investors focused on growth risks and equity market drawdowns may prefer to fund commodities more heavily from equities.
How does CIO's commodity approach compare with other tools?
Exposure to commodities can be obtained through broad commodity indices, exchange-traded funds, or actively managed strategies. While passive approaches offer simplicity, they may not fully capture the opportunities available across different commodity sectors and market environments.
This is the rationale behind the CIO Active Commodity Strategy.
The strategy is designed around three complementary return drivers. First, it actively manages overall commodity exposure through a systematic assessment of economic and market conditions. Second, it applies active sector allocation based on CIO's views across areas such as energy, industrial metals, agriculture, livestock, and precious metals. Third, it seeks to enhance returns through active management of the collateral that supports commodity futures positions.
This approach reflects the fact that the attractiveness of commodities changes over time. Inflation expectations evolve, economic growth accelerates and slows, and sector-specific supply-demand dynamics shift continually. Active management seeks to adapt to these changing conditions rather than maintaining a static exposure throughout the cycle.
Investors today face a more complex environment than the one that prevailed during much of the past decade. Inflation risks remain elevated, geopolitical tensions continue to influence markets, and stock-bond diversification is not guaranteed.
Against this backdrop, we believe commodities can offer a compelling complement to traditional portfolios.
For more details on commodities in a portfolio context, please see our blog 10-4 on commodities: 10 takeaways, including 4 investment rationales (30 June 2026).
