Commodities
Commodities are raw materials such as energy, metals and agricultural products. When investing in commodities, you are investing in the price movement of these physical goods, rather than earnings — because commodities do not generate income like dividends (shares) or interest (bonds).
Returns come primarily from price changes, which are driven by supply and demand, economic growth, currency movements (most are priced in US dollars), and inflation expectations. Commodities can provide diversification and may act as an inflation hedge, but their prices can be highly volatile due to weather events, supply disruptions and global market cycles.
Most investors access commodities through ETFs, which typically hold either physical assets (e.g. gold in vaults), futures contracts (a contract locking in today's price for a future delivery), or commodity-producing companies (e.g. mining, energy) whose profits are linked to commodity prices. Direct ownership is generally impractical due to storage and logistics.
Total Return ≈ Price Change ± Roll Yield (futures contracts) - Storage Costs (physical holdings) - Management Fees
Commodities sit higher on the risk spectrum than cash and bonds but do not offer the structural growth of equities. They are best viewed as cyclical assets that can support diversification and inflation sensitivity within a broader portfolio.
For most people commodities are not needed in their portfolio as the returns are poor, and only needed in certain situations such as when inflation is high or when the economy is in a recession. Most people would not be trying to time the market in this way, and can get similar inflationary protection through other assets.
| Method | Description | Example | Considerations |
|---|---|---|---|
| Physical Holdings | ETF holds the actual commodity (e.g. gold bars stored in vaults). | GOLD – ETFS Physical Gold | Closest to the spot price; storage and insurance costs included in price. No use of the physical asset by the investor. |
| Futures Contracts | Uses contracts that follow the future price of the commodity instead of holding it physically. These contracts are renewed over time. | OOO – BetaShares Crude Oil ETF | Performance affected by roll costs and whether futures are priced above or below spot (contango/backwardation). |
| Commodity Companies | ETF invests in companies involved in producing or extracting commodities. | QRE – BetaShares Resources ETF | Returns depend on company profits, costs and market conditions, not just commodity price direction. Can be more volatile than the commodity itself. |
Commodity Risk vs Return
Commodity Price Drivers Over Economic Cycles
FAQ
A futures contract is an agreement to buy or sell a commodity at a predetermined price on a specific future date. Instead of buying the commodity today (spot price), you lock in today's price for delivery later. Many commodity ETFs use futures contracts because they're easier to trade than physical commodities. When the contract nears expiration, ETFs "roll" it forward by selling the expiring contract and buying a new one for a later date, which can create costs or gains depending on market conditions (contango or backwardation).
Contango occurs when futures prices are higher than the current spot price, often because storage, insurance, and financing costs are built into future contracts. Rolling futures in contango typically reduces returns (you sell low, buy high). Backwardation is the opposite: futures prices are below the spot price, usually due to immediate scarcity or strong near-term demand. Rolling in backwardation can enhance returns (you sell high, buy low).
Physical gold ETFs (like GOLD) hold actual gold bars in vaults, avoiding contango but including storage costs. They're convenient and secure. Buying physical gold directly requires storage, insurance, and security arrangements. For most investors, a physical gold ETF is simpler and safer.
Most commodities are priced in US dollars. If you buy a commodity ETF in Australian dollars, a weaker AUD increases your returns (you get more AUD per USD), while a stronger AUD reduces returns. Some ETFs offer currency-hedged versions to remove this effect.
Yes, historically commodities have provided some protection against inflation. When the cost of living rises, commodity prices often rise too. Precious metals, especially gold, are traditional inflation hedges. However, this relationship isn't guaranteed and can vary over time.
Not exactly. Inflation sensitivity means an asset's price tends to move with inflation — when inflation rises, the asset price may rise too. Inflation protection means the asset helps preserve your purchasing power by keeping pace with or exceeding inflation. Commodities are sensitive to inflation, which can provide protection, but sensitivity doesn't guarantee protection. Other factors like supply disruptions or economic cycles can cause commodity prices to move independently of inflation.
You can invest in individual commodities through single-commodity ETFs (e.g., gold, oil, wheat). However, individual commodities are more volatile and risky. Diversified commodity ETFs spread risk across energy, metals, and agriculture, providing smoother returns with less concentration risk.