Commodity ETFs Provide Diversification and Protect Against Inflation | ETF Trends

Commodities and related exchange traded funds have underperformed equities and fixed-income markets over the past few years, but investors should not ignore the benefits of including some exposure to diversify their portfolios.

The broad commodities market has been falling behind. Year-to-date, the GreenHaven Continuous Commodity Index Fund (NYSEArca: GCC) dipped 4.8%, PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) fell 4.3%, iPath Dow Jones-UBS Commodity Index Total Return ETN (NYSEArca: DJP) declined 4.4% and iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG) was down 2.6%.

Nevertheless, Gary Gorton and K Geert Rouwenhorst, both of Yale School of Management, argue that investors should not overlook commodities investments, Financial Times reports.

Specifically, the academics’ research found that a commodities futures index provided similar returns to equities but moved out of step with equities and fixed-income assets. The lower correlation to traditional assets is an attractive diversification quality. Additionally, the researchers found that commodities protected against inflation better than stocks and bonds.

Over the past decade, the benefits of holding commodities exposure have not changed, Professors Gorton and Rouwenhorst contend.

“I think you should always have exposure to commodity futures if you’re a large investor,” Prof. Gorton said.

More recently, many market observers argued that the greater interest in commodities among institutional and speculative traders have fueled volatility. Nevertheless, in their latest paper, Facts and Fantasies about Commodity Futures Ten Years Later, Profs Gorton and Rouwenhorst argue that the impact of financialization was marginal and that their previous recommendation for institutions to hold commodities still holds true.