Commodities form the foundation of the global economy, and many investors prefer to allocate a good chunk of their portfolio to them for diversification purposes. This can be a wise move, as commodities are often more volatile while showing lower correlation with most other asset classes, injecting new blood into portfolios and hedging against inflation.
Investors can build a more balanced portfolio by connecting to a platform for trading commodities or by adding commodity exchange-traded funds (ETFs) to their stock portfolio.
Before discussing the role of commodities in a diversified portfolio, let’s first see how they fit into Modern Portfolio Theory.
Commodities in the context of Modern Portfolio Theory (MPT)
In a nutshell, MPT suggests that diversification is the key to maximize returns while minimizing risks.
For example, if you were preparing for a long trip, you would take an umbrella, sunscreen, and a warm jacket, because you should be ready for all kinds of weather. Diversifying your portfolio with the MPT strategy means preparing for a wide range of economic ‘climates.’
Exposure to different asset classes helps investors benefit from the returns of more volatile assets while protecting against expected market downturns.
The MPT was introduced by the American economist Harry Markowitz in 1952 in a paper titled “Portfolio Selection.” Markowitz received the Nobel Prize for his work on this investment approach, making the concept of the balanced portfolio one of the foundations of modern investing.
In fact, there are many mutual funds in the US that follow the MPT principles to improve the performance of their portfolios.
Markowitz envisioned a diversified portfolio that gives exposure to different asset classes, including company stocks, bonds, real estate, and commodities.
Commodities play an important role here thanks to several attributes that we’re about to discuss.
How do commodities integrate into balanced portfolios?
Today, markets have become unpredictable due to the ongoing geopolitical conflicts, with the Ukraine-Russia war and US-Iran conflict taking centre stage. Meanwhile, the risk of de-dollarization and the emergence of a multi-polar world bring tectonic shifts to the global economy.
Considering this ongoing uncertainty and fragility, investors are adjusting their understanding of a balanced portfolio. They no longer prefer the traditional mix of 60% allocated to stocks and 40% to bonds, but leave room for more volatile assets, especially commodities.
One of the main benefits of commodities is that they ensure diversification while protecting against inflation. Energy products, precious and industrial metals, as well as agricultural products, tend to increase in value when inflation goes up, serving as a protective mechanism when other assets are affected by inflation.
Another benefit is that commodity futures products enable margin trading, allowing investors to apply leverage and commit a portion of the total capital. Margin trading is also possible with stocks, but the maximum leverage is much lower, usually 2:1 versus up to 20:1 for commodities.
Given these advantages and the current market conditions, many advisors are considering commodities along with other alternative assets to enhance diversification. For example, a 2026 survey conducted by Aberdeen Investments and CoreData Research found that more than half of diversification-focused advisors include broad commodities in their strategy.
Interestingly, 41% of the 300 US financial advisors plan to increase allocations to precious metals and other commodities.
CoreData Research
Meanwhile, over 75% of advisors expect commodities to boost diversification over both 12 months and five years.
Indeed, precious metals are often preferred because they are regarded as safe-haven assets during periods of geopolitical risk. Nearly two-thirds of respondents cited geopolitical risk hedging as one of the main benefits.
Also, the rapid development of artificial intelligence (AI) infrastructure boosted demand for some industrial metals, such as copper.
Commodities are playing a bigger role in balanced portfolios due to their ability to stay defensive while also being prone to rapid bullish moves.
The correlation of commodities to other assets
Investors prefer commodities because they show lower correlation to other asset classes, such as stocks or bonds.
In fact, stocks and bonds have a habit of falling together exactly when investors need them not to. UBS Wealth Management’s March 2026 outlook expects commodities to take on a bigger portfolio role this year, citing their historically low correlation with equities and bonds during periods of geopolitical stress.
Today, the most traded commodities, including gold and oil, have shown lower correlation figures. For example, the 1-year rolling correlation between gold and the S&P 500 index is approaching 0 as of August 2026.
Longtermtrends.com
This weak relationship means commodities don’t tend to move in the same direction as traditional financial assets. Because of this, they help investors offset losses during periods of market stress. Meanwhile, they also add a new source of potential returns.
Allocating between 5% and 20% of your portfolio to commodities can contribute to a more resilient and balanced portfolio.
Leave a Comment