· Listen
Commodities are raw, basic goods used to make other things: gold, silver, oil, natural gas, copper, corn, wheat, coffee. They are the inputs to nearly every product in the economy.
How to invest without driving a tanker truck home
- Commodity ETFs: funds that hold physical metals or futures contracts on oil, agriculture, etc.
- Stocks of producers: owning Exxon is exposure to oil; owning Newmont is exposure to gold.
- Futures contracts: direct, but complicated and not appropriate for most beginners.
Why some investors hold them
Commodities sometimes rise when stocks fall, especially during inflationary periods or supply shocks. Some investors keep a small slice (often 5 to 10%) in commodities as a diversifier.
Why they can be frustrating
- Commodities pay no dividends and produce no earnings. Their return depends entirely on price changes.
- Long-term real returns of broad commodities have historically been close to zero or even negative.
- Commodity ETFs that use futures can suffer from 'roll costs': the fund loses money rolling expiring contracts forward, eating returns.
What this lesson is NOT
Commodities can diversify a portfolio, but they pay no interest or dividend, they swing hard, and over long stretches they have produced little real return. This lesson explains that frustrating side honestly; it is not a case that anyone needs them or a call on where a price goes next.
Quick check on this lesson
Answer each question and we’ll show you why the right answer is right, and why the others aren’t.
- 1.
Per the lesson, what are commodities?
- 2.
Per the lesson, what are three ways to invest in commodities without taking physical delivery?
- 3.
Per the lesson, why do some investors hold a small slice of commodities, and roughly what allocation does the lesson mention?
- 4.
Per the lesson, why can commodities be frustrating to hold long-term?
- 5.
Per the warning callout, what's the lesson's honest assessment of gold as a long-term investment?
0 of 5 answered