WSJ Your Money Briefing - How Investing in Commodities Can Be a Hedge Against Uncertainty

Episode Date: January 2, 2025

Some investment professionals say that a small allocation of commodities in your portfolio can help diversify your investments and protect against inflation. Wall Street Journal contributor Debbie Carlson joins host J.R. Whalen to discuss what you need to know to start investing in commodities, according to the pros.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Get groceries delivered across the GTA from real Canadian superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit superstore.ca to get started. Here's your money briefing for Thursday, January 2nd. I'm JR Whalen for The Wall Street Journal. Many people select stocks as their main investment option, but financial professionals recommend those managing their portfolio or 401k also include commodities like gold, oil, or corn, especially as inflation is creeping higher. Commodities reflect current prices as opposed to stocks, which may reflect future earnings potentials.

So commodities will reflect what's going on now. And that is one of the reasons why we can be an inflation hedge, because as demand for commodities goes up, the prices goes up. We'll talk to Wall Street Journal contributor Debbie Carlson after

the break. Financial professionals say commodities can be a good addition to your portfolio. Wall Street Journal contributor Debbie Carlson joins me. Debbie, when we say commodities, what types of investments are we talking about? When we talk about commodities, we're talking generally about natural resources. So that can range everything from crude oil to corn to cocoa, even to gold and silver. So it's a wide variety of products. Why do financial professionals recommend people consider including them in their portfolio? Commodities don't always get the attention that stocks do and they're a great

hedge because they're usually not correlated with stocks. They can be a good diversification hedge, they can be a hedge against volatility, they can be a hedge against inflation, they can also play a safe haven role. That's why a lot of financial professionals recommend people include at least a small portion to commodities. You mentioned inflation. How do higher prices factor into commodities' role in your portfolio? There's been some research done by Invesco

that since 1998, when the CPI, the Consumer Price Index, is greater than 2% commodities broadly had positive returns 74% on the time and when CPI is less than 2% commodities had negative returns 84% of the time. And the reason why that is commodities reflect current prices as opposed to stocks which may reflect future earnings potentials. So commodities will reflect what's going on now and that is one of the reasons why it can be an inflation hedge because as demand for commodities goes up, the prices goes up

and so that is why they can be a good inflation hedge. How would somebody buy commodities? The easiest way for the average person is to use an exchange traded fund. You can also buy futures, you can buy managed futures, but it's just much more simple for someone to buy an ETF because they could go to their brokerage account and simply buy one of the many ETFs that are out there. You mentioned that commodities are often a measure of current prices, but we also talk about oil futures, for example. What's the difference there? When we talk about commodities, we can talk about spot prices

and we talk about futures prices. The spot price is the price of the commodity today. The futures price is the expectations for the price in the future, which is why it's called the futures. And there's something known as a futures curve and traders will buy and sell and do price discovery to get a sense of what a commodity might be worth

in the future based on what is known today. What kind of strategy should an investor use when buying commodities? The best way to look at it is to think about a broad-based commodities index. And the reason why you think about a broad-based commodities index. The reason why you want to think about broad-based is you can have exposure across the major commodity indexes in a single fund.

Commodities don't move in lockstep. Some prices will be higher, some will be lower. You can look right now, gold and soft commodity prices like coffee and cocoa are up, but grains are down. By buying an index, it will even out the returns. And more important, it's hard to predict when a market is going to move. So if you don't have exposure, you will miss much of the rally if you're not invested. So again, classic don't time the market. You said somebody can buy commodities in an exchange traded fund.

Sounds a lot like how they would buy stocks. fund sounds a lot like how they would buy stocks It is a lot like how they would buy stocks and most of the commodities indexes are Based on futures contracts and so you will have exposure for the different markets So when you buy an ETF you want to definitely look under the hood like you would with a stock ETF Most commodities indexes will have exposure to the major markets. So you want to look to find something that has exposure to energy, crude oil for instance, natural gas. Look for something of exposure to gold and corn. And then look at the weightings like how much energy, how much gold and And then look at the weightings, like how much energy, how much gold, and compare ETFs to see, is this the exposure that I want?

There are some individual ETFs out there like just gold or just energy. But again, having a broad base means that you don't have to follow the individual fundamentals of a particular commodity. How can a financial professional help them navigate this? A financial professional can talk to a client and ask them what are your goals, why you have this interest in owning commodities. Because certain commodities have different impacts on a portfolio like for instance gold may be more of a safe haven purchase what base commodities like agriculture could be more of an inflationary purchase and again this is why having a broad base index

is a good way to go about it generally like in our current macro environment with inflation still above two percent geopolitical uncertainty climate change causing more extreme weather. A financial professional will look at like how much of the portfolio do we want to carve out to be this hedge? And currently they're saying about 5% in a broad based portfolio. And when we break that down, say for a million dollar portfolio, that's only $50,000. So we're not talking like a lot of exposure, but that small exposure, because the volatility that you get with commodities can help you get just enough exposure to make it beneficial to hold.

That's WSJ contributor, Debbie Carlson. And that's it for your money briefing. This episode was produced by Ariana Asparu with supervising producer, Melanie Roy and development producer, Aisha Al-Muslim. I'm JR Whalen for the Wall Street Journal. Thanks for listening.