Commodities as an Asset Class

Includes: GCC, GSG, GSP
by: Hard Assets Investor

By Brad Zigler

According to some advisors, commodities can be a class act. Others view futures as having no, um, future.

A line seems to have been drawn in the sand at Hard Assets Investor on this issue. Just this week, Larry Swedroe, the director of research for Buckingham Asset Management and the author of several books on investment, argued in "GSCI or DJ-AIG?" that commodities deserve a place setting at the asset allocation table despite their deeply cyclical nature.

Swedroe says the seemingly inferior returns and greater volatility of the S&P/GSCI (versus the SPX, or the S&P 500) actually produces a counterintuitive benefit. If one overlaid just a 5% allocation to the commodities index on an SPX-based portfolio from 1991 through 2007, says Swedroe, a slightly higher return could be earned with less overall risk.

"Every investor should prefer the portfolio that included the lower-returning and more volatile S&P GSCI," says Swedroe. The reason for the improved portfolio results, claims Swedroe, is the negative correlation of equities and commodities.

Rick Ferri, a financial advisor who's no slouch in the book-authoring department himself, takes issue in "An Interview With Rick Ferri" by contending commodities offer no return above inflation.

"You need to earn money if you are going to eat well in the future. You can't eat lower volatility," says Ferri.

So, where, if anywhere, DO commodities fit in?

According to Watson Wyatt's Byron Been and Beat Zaugg, writing in the September 2004 issue of Alternative Investments, an investment can generally be considered a separate asset class when:


  • its returns are independent from other asset classes (low correlation)
  • its return is both positive and significantly different from cash
  • its return cannot be replicated with a combination of other asset classes


The upcoming Great Commodity Debate between Ferri and Swedroe should shed more light on this subject. And it should generate some heat as well.