Asset Allocation—Commodities or Commodity Stocks?

This study addresses an important asset allocation dilemma, namely whether investors should diversify their portfolios using commodities directly or commodity stocks, which are equity shares of companies that produce commodities or have a strong relationship to them. The results of the study indicate that commodities added to a stock-bond portfolio perform better than commodity stocks in a stock-bond portfolio. The dominance of commodities portfolios is observed during the in-sample, out-of-sample, and current epidemic time periods. At standard levels of statistical significance, the Sharpe ratios of commodities portfolios are statistically significant. An important outcome of the study is that adding commodities to a portfolio consisting exclusively of stocks and bonds will benefit investors. However, portfolios containing only gold will perform substantially better than portfolios containing the whole range of commodities, such as base metals and energy contracts.