Facts and Fantasies about Commodity Futures
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What they found
The authors built an equally weighted index of fully collateralized commodity futures from 1959 to 2004 and compared it with stocks and bonds. The commodity futures index earned a risk premium comparable to stocks with similar volatility, was negatively correlated with stocks and bonds, was positively correlated with inflation (especially unexpected inflation), and did well when stocks did badly. They emphasized that returns to futures come from the risk premium and roll, not from spot commodity price appreciation, which was roughly flat in real terms.
What you can use
- A diversified basket of commodity futures historically earned stock-like returns with low correlation to stocks and positive correlation to inflation.
- The returns came from the futures risk premium and roll yield, not from commodity prices going up.
- Commodities were one of the few assets that helped during equity bear markets and inflation surprises.
Caveats
Equal weighting and monthly rebalancing drive much of the return; investable indices weight differently and have done worse. The decade after publication (2008 to 2020) was very poor for commodity futures. Free NBER version available.
Tags: commodities, futures, diversification, inflation
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.