Commodities can be valuable holdings for an investor because their returns are not or negatively correlated with the stocks and bonds. Instead of buying physical commodities directly, the investor can purchase futures contracts based on an index composed of different commodities. This is the same as a stock index where the prices of stocks create the index price. Some examples of commodities indices are the S&P Goldman Sachs Commodity Index, Dow Jones-AIG Commodity Index and Reuters/Jefferies-CRB Index. Each index contains different commodities, weights and manners of settling expiring and buying new contacts.
In a period of high inflation, commodity futures provide downside protection because the underlying commodity prices increase and securities decrease. The CAIA study material and Mark Anson's
Handbook of Alternative Assets cite a study from 1990-2008 where a 60%/40% investment in the S&P 500 and US Treasury bonds are compared to a 55%/35%/10% investment in the S&P 500, US Treasury bonds and a commodity index. On the general, the average monthly return remains the same but the summary chart shows the following benefits:
- Steadier monthly returns
- Less months with negative returns
- Average negative return is lower
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