Trevor Greetham is a clock-watcher, but not the kind who’s desperate to leave the office. Managing pension funds for Royal London, he tracks an investment clock which steers his asset allocation decisions for stocks, bonds, commodities and cash.
Greetham believes the best time for commodities approaches. He predicts major economies such as the US could overheat in the next two years, and he has prepared for the beginning of another commodity supercycle. He holds a £4bn allocation of commodities, about 5 per cent of his portfolios, ranging from metals and energy to wheat and other physical assets.
Investing in commodities has become more popular in the past year. But are they suitable for the average retail investor?
Fans such as Greetham think commodities do not over time track popular assets such as equities and bonds. That’s no bad thing given persistent concerns about an AI-led technology bubble and the heavy borrowing needs from leading economies. Commodities can help reduce risk and diversify one’s portfolio, while also hedging against bouts of inflation.
Added to these factors is the decline in the dollar. Those commodity consumers in non-dollar economies should find these cheaper to buy, all things being equal, when the buck loses ground. For the past 25 years broader commodity indices have often rallied when the dollar slides, as it did last year.
Already commodities have begun to perk up. After a sluggish three-year period, the Bloomberg Commodity Index, covering a broad spectrum of 25 commodities, such as gold, crude oil and copper, has rallied 18 per cent in the past six months, outrunning both world equities and bonds.
Some, like Greetham, prefer to own the commodities themselves, using index funds and derivatives. Last year, inflows to the broad basket of European commodity tracker funds were the highest in four years, according to Morningstar Direct.
There is another choice, however. Owning the shares of commodity producers and traders provides exposure to their rising profits from a commodities rally, including listed miners, oil and gas explorers and agricultural traders. These companies not only produce metals, but, if financially strong enough, they can fund expansion for further growth.
The question, for those favouring commodities, is whether to own pure commodities or buy the listed producers of these commodities. Each approach has its pros and cons.
The dollar’s long-term trajectory has changed. US investors haven’t had to worry about a persistently weak dollar in nearly two decades. It’s time to rethink that assumption, particularly when US stocks and bonds dominate most benchmark indices that passive funds follow.
As measured by the US Federal Reserve’s trade-weighted index, the dollar hit a 20-year peak just over a year ago. It has dropped ever since and so far this year the dollar has slipped further. Other than just moving into European and emerging markets to capture the currency shift, commodities offer another option.
The main commodity indices, BCOM and S&P’s GSCI index, have tended to move counter to the dollar index since 2000. A palpable sense of concern for the dollar’s value has pulled investors towards hard assets such as precious and industrial metals, and commodity-related currencies such as the Australian dollar and Brazil’s real.
To be clear, there is no evidence of any US fire sale and US Treasury data from overseas investors show that they bought more, not less, US stocks and bonds last year.
Yet dollar risk is being hedged. “We’re seeing more flows shift over to hedging,” says Karim Chedid, head of Emea investment strategy at BlackRock. In 2024, about 2 per cent of all equity flows were hedged from Europe, according to BlackRock data, but that jumped to 38 per cent in 2025.
It’s not just about currencies. Commodity experts cite a potential supply shortfall in the years ahead for critical minerals, such as copper. “Commodities tend to go through cycles . . . We appear to be in the foothills of the next cycle,” thinks Evy Hambro, global head of thematic and sector investing at BlackRock. “There’s been under-investment in mining supply.”
Just over a decade ago, commodity producers began shying away from digging for metals and drilling for oil. Ben Davis, head of European metals & mining research at RBC Capital Markets, thinks this was for good reason. Despite heavy spending in years past, diverting tens of billions of dollars in cash flow, there was little evidence of a significant increase in production.
Shareholders began to demand that any extra cash flow generated by these companies be returned to them, either in share buybacks or dividends.
What followed was a decline in spending by the world’s largest miners, including Freeport-McMoran, Rio Tinto, BHP, Anglo-American and Glencore. Between 2015 and 2022, spending at these miners dropped markedly, by at least a third, partly due to sluggish prices for metals and energy. Investment spending only started rising again in 2023, according to data from RBC Capital Markets and S&P Capital IQ.
Rebekah McMillan, a portfolio manager on the Neuberger Berman multi-asset team, focuses on two metals, rather than a spread of commodities.
They have been long gold — which Neuberger Berman has had since November 2023 — due to fiscal deficit concerns and an expectation that real interest rates could fall in the US. Her team also owns copper, which should benefit from the boom in AI-related power investment in the US and elsewhere.
Chedid at BlackRock agrees. “Demand for metals needed for electrification exceeds the supply available for things like copper, lithium and other battery materials.”
Delivering above-inflation returns, exceeding those on cash deposits, is a key reason Greetham sticks with commodities. Since no one wants actually to own or store physical metals, grains or barrels of oil, he employs either exchange traded products or derivatives that track underlying commodity prices.
He keeps his holding at 5 per cent on average partly to protect against bouts of unexpectedly high inflation. He argues that commodities have performed this hedging role while also generating good returns for investors.
On his numbers, commodities provided an annual return of 6.7 per cent in pounds, some 5 per cent above cash at 1.7 per cent over the past 10 years. That easily beat 10-year gilts, which were just above zero during the period, while tracking not far below UK stocks.
What if you’re convinced about commodities but unsure how to go about investing in them? Assuming one wants more exposure, there are a number of ways to go.
Certainly, the most popular and focused approach to capture both portfolio diversification and inflation hedging has been via gold. However, the sharp run up in its price — gold and silver values have roughly tripled over five years — might encourage investors to consider other choices on the pure commodity side.
If you would rather not bet on a specific commodity or a group, such as industrial metals, ETPs tracking broad commodity indices, such as the BCOM or S&P GSCI, offer a passive approach. All the big ETP sponsors, such as BlackRock’s iShare, Vanguard, Wisdom Tree and L&G, offer various forms of trackers on commodity indices.
L&G argues that a low correlation of 35 per cent exists between its ETPs and its equity-plus-bond portfolios over time. That means adding these commodity funds should lower risk in a broader portfolio. That’s the good news.
The problem comes with the cost of automatically rolling over, or renewing, any expiring contracts. “You don’t buy the commodity itself, you buy derivatives and the roll overs have a cost,” points out Kenneth Lamont, a principal in Morningstar’s research department and a passive fund specialist.
Usually, the prices of commodity futures reflect the cost of money and storage for the months ahead. By selling any expiring contracts low at spot prices and then buying high to replace the expiring futures, there is a drag on performance. Doing this across the 24 different commodities in the BCOM index at regular intervals during the year will add up.
There are ways to minimise this drag by using more sophisticated ETPs which adjust the rollover timing, though these have higher management fees. L&G offers these “smart index” products at roughly double the typical cost, roughly 30 basis points.
While that may not sound like much, performance of broadly diversified commodity funds has trailed that of global natural resource equity funds. Over the past decade through to January this year, the return from these stock funds roughly tripled that of the underlying commodities according to data from Morningstar Direct. That disparity holds true for precious metals and energy as well.
“Copper miners make money from producing but also can explore for more,” says George Cheveley, a natural resources portfolio manager at Ninety One. “I prefer to invest in companies that have production but also have exploration.” Volume growth can multiply the effect of any price increases.
Could oil have a comeback, after a multiyear bearish run? Cheveley’s colleague Paul Gooden, in charge of the Natural Resources team and an energy specialist, has mixed feelings.
“We’re slightly underweight on energy stocks in our fund. The outlook for oil prices in the next three to four months is not great because of oversupply.” Once that overhang is absorbed a multiyear rally could follow, he thinks.
The most important question for a private investor to ask is: what is your timeframe? There is some evidence that putting your money into pure commodities can offer an inflation hedge for shorter periods. Geopolitical flare ups, such as the Ukraine invasion and the Israeli-Gaza conflict, have caused spikes in oil prices. Precious metals, too, have delivered very strong gains.
Yet anyone shy of taking such concentrated bets might find that diversified commodity indices, such as BCOM and S&P GSCI, are only for patient investors. The BCOM index has not delivered a positive return over 20 years, according to FT calculations, trailing both world equity and bond indices by considerable margins.
Investing in the equity funds of commodity producers, via active funds or exchange traded funds, can amplify underlying price performance.
If you think the clock is ticking quickly towards a period of reflation, adding some pure commodity funds makes sense. Otherwise, buying natural resource equities should offer the best leverage to any further rise in commodity prices.
