Description
Commodity indexes use vastly different
component allocations, investment
methodologies, and rebalancing frequencies
which can lead to large differences in
performance. Some indexes are less diversified
than others and some overweight specific sectors,
such as energy or precious metals. But a well
constructed commodity index can provide an
additional layer of diversification through a better
balance of exposure to noncorrelated components
within the index itself.
Something that separates commodity returns
from those of stocks and bonds is the inherent
return generated from inflation. When the
markets expect inflation, bonds generally drop
in price as interest rates often rise.
Many people would think stock prices could drop as well if the cost of materials used to create products begins to rise. Yet a commodity index might be expected to rise in response to higher prices for raw materials. This response to inflation expectations actually provides the rationale for a low correlation between a commodity index and stocks and bonds. The case for including commodities in a portfolio is simple—exposure to the asset class may help diversify a portfolio from some unexpected events. As with any asset class, nobody can predict with certainty when to put commodities to work in a portfolio.
Therefore, investors may want to consider commodity exposure as an ongoing allocation to their portfolio. Commodities have historically produced returns that are competitive with equities, but often at different times. Remember that commodities, as a stand-alone investment, do have specific risks that are unique to the asset class. But as a diversification component, commodities may also provide long-term benefits due to their historically low correlation with other asset classes such as stocks and bonds. Commodity Index Performance Bloomberg Commodity Index S&P GSCI Longview Extended Commodity Index Stocks (S&P 500) 2000 31.84% 49.74% 9.06% -9.10% 2001 -19.51% -31.93% -15.67% -11.89% 2002 25.91% 32.07% 20.17% -22.10% 2003 23.93% 20.72% 15.12% 28.68% 2004 9.15% 17.28% 26.04% 10.88% 2005 21.36% 25.55% 41.53% 4.91% 2006 2.07% -15.09% 11.41% 15.79% 2007 16.23% 32.67% 28.31% 5.49% 2008 -35.65% -46.49% -25.36% -37.00% 2009 18.91% 13.48% 20.20% 26.46% 2010 16.83% 9.03% 24.39% 15.06% 2011 -13.32% -1.18% -2.23% 2.11% 2012 -1.06% 0.08% 2.80% 16.00% 2013 -9.52% -1.22% -9.65% 32.39% 2014 -17.01% -33.06% -15.11% 13.69% 2015 -24.66% -32.86% -18.97% 1.38% 3 Years -17.29% -23.71% -14.66% 15.13% 5 Years -13.47% -15.18% -8.98% 12.57% 10 Years -6.43% -10.56% -0.03% 7.31% Bear Market 8.29% 7.73% 2.53% -16.09% Bull Market 15.90% 18.78% 29.50% 17.22% Financial Crisis -12.53% -22.07% -5.28% -10.74% Risk 18.09% 23.77% 17.86% 15.00% Correlation 0.50 0.50 0.46 1.00 As of 12/31/2015 Apr 2000-Mar 2003 Apr 2003-Mar 2006 Jan 2008-Dec 2009 (10-year) vs S&P 500 (10-year) Source: FactSet and Bloomberg as of 12/31/2015 The Bloomberg Commodity Index, S&P GSCI, and Longview Extended Commodity Index are all benchmarks for broad-based commodity exposure.
The S&P 500 Index, shown as a proxy for stock investments, is a widely known broad-based equity index. Index returns assume reinvestment of all dividends and do not reflect any management fees, transaction costs or expenses. The indexes are unmanaged and are not available for direct investment. Standard Deviation (Risk) is a statistical measurement of volatility based on historical returns. Correlation measures how closely two securities’ movements are associated, ranging from 1.0 (highly correlated) to -1.0 (inversely correlated). Past performance is not indicative of future returns.
The information shown herein is for illustrative purposes only and should not be used as a predictive measure for the future return expectations of any investment. The information is subject to change or revision without notice, should not be construed as a recommendation of any specific security or investment product, and was prepared without regard for specific circumstances and objectives of any individual investor. All investments involve risks, including the potential for loss of principal.
Nontraditional and alternative investments may involve additional risks specific to the asset class. Before investing in any financial product, always read the prospectus and/or offering memorandum for product-specific risks. AD-032316 .
Many people would think stock prices could drop as well if the cost of materials used to create products begins to rise. Yet a commodity index might be expected to rise in response to higher prices for raw materials. This response to inflation expectations actually provides the rationale for a low correlation between a commodity index and stocks and bonds. The case for including commodities in a portfolio is simple—exposure to the asset class may help diversify a portfolio from some unexpected events. As with any asset class, nobody can predict with certainty when to put commodities to work in a portfolio.
Therefore, investors may want to consider commodity exposure as an ongoing allocation to their portfolio. Commodities have historically produced returns that are competitive with equities, but often at different times. Remember that commodities, as a stand-alone investment, do have specific risks that are unique to the asset class. But as a diversification component, commodities may also provide long-term benefits due to their historically low correlation with other asset classes such as stocks and bonds. Commodity Index Performance Bloomberg Commodity Index S&P GSCI Longview Extended Commodity Index Stocks (S&P 500) 2000 31.84% 49.74% 9.06% -9.10% 2001 -19.51% -31.93% -15.67% -11.89% 2002 25.91% 32.07% 20.17% -22.10% 2003 23.93% 20.72% 15.12% 28.68% 2004 9.15% 17.28% 26.04% 10.88% 2005 21.36% 25.55% 41.53% 4.91% 2006 2.07% -15.09% 11.41% 15.79% 2007 16.23% 32.67% 28.31% 5.49% 2008 -35.65% -46.49% -25.36% -37.00% 2009 18.91% 13.48% 20.20% 26.46% 2010 16.83% 9.03% 24.39% 15.06% 2011 -13.32% -1.18% -2.23% 2.11% 2012 -1.06% 0.08% 2.80% 16.00% 2013 -9.52% -1.22% -9.65% 32.39% 2014 -17.01% -33.06% -15.11% 13.69% 2015 -24.66% -32.86% -18.97% 1.38% 3 Years -17.29% -23.71% -14.66% 15.13% 5 Years -13.47% -15.18% -8.98% 12.57% 10 Years -6.43% -10.56% -0.03% 7.31% Bear Market 8.29% 7.73% 2.53% -16.09% Bull Market 15.90% 18.78% 29.50% 17.22% Financial Crisis -12.53% -22.07% -5.28% -10.74% Risk 18.09% 23.77% 17.86% 15.00% Correlation 0.50 0.50 0.46 1.00 As of 12/31/2015 Apr 2000-Mar 2003 Apr 2003-Mar 2006 Jan 2008-Dec 2009 (10-year) vs S&P 500 (10-year) Source: FactSet and Bloomberg as of 12/31/2015 The Bloomberg Commodity Index, S&P GSCI, and Longview Extended Commodity Index are all benchmarks for broad-based commodity exposure.
The S&P 500 Index, shown as a proxy for stock investments, is a widely known broad-based equity index. Index returns assume reinvestment of all dividends and do not reflect any management fees, transaction costs or expenses. The indexes are unmanaged and are not available for direct investment. Standard Deviation (Risk) is a statistical measurement of volatility based on historical returns. Correlation measures how closely two securities’ movements are associated, ranging from 1.0 (highly correlated) to -1.0 (inversely correlated). Past performance is not indicative of future returns.
The information shown herein is for illustrative purposes only and should not be used as a predictive measure for the future return expectations of any investment. The information is subject to change or revision without notice, should not be construed as a recommendation of any specific security or investment product, and was prepared without regard for specific circumstances and objectives of any individual investor. All investments involve risks, including the potential for loss of principal.
Nontraditional and alternative investments may involve additional risks specific to the asset class. Before investing in any financial product, always read the prospectus and/or offering memorandum for product-specific risks. AD-032316 .
