What are commodities and how do people invest in them? Commodities are raw materials or primary goods like oil, gold, or agricultural products. Most individual investors gain exposure not by holding the physical goods directly, but through commodity-focused ETFs, mutual funds, or futures contracts, often as a small diversifying slice of a broader portfolio rather than a core holding.

Article Summary

  • Commodities generally don't generate income like dividends or interest — returns depend entirely on price changes.
  • Commodities have historically shown a different relationship to inflation and economic cycles compared to stocks and bonds, which is the core diversification argument for including them.
  • Most individual investors access commodities through funds rather than holding physical goods or trading futures contracts directly.

"The four most dangerous words in investing are: 'this time it's different.'"

Sir John Templeton

Commodities — oil, gold, wheat, natural gas, and other raw materials — sit outside the stocks-and-bonds core of most portfolios, but they play a distinct role for investors who choose to include them. Unlike a share of stock, a commodity doesn't represent ownership in a business or generate income on its own; its return comes purely from price movement, driven by supply, demand, and macroeconomic forces that can behave differently than financial markets.

What Counts as a Commodity

Commodities are generally raw materials or primary agricultural products that are largely interchangeable regardless of who produced them — energy commodities like oil and natural gas, metals like gold and copper, and agricultural products like wheat, corn, and coffee are all common examples.

Because commodities are standardized and traded globally, their prices are generally driven by broad supply and demand forces, geopolitical events, and macroeconomic conditions, rather than company-specific factors like earnings or management decisions.

How Individual Investors Typically Gain Exposure

Most individual investors don't buy and store physical commodities directly — instead, they typically gain exposure through commodity-focused ETFs or mutual funds, which may hold futures contracts, physical stores of the commodity (as some gold funds do), or shares of companies involved in producing the commodity.

Directly trading futures contracts is generally considered a more advanced, higher-risk approach involving leverage and complexity that most individual investors are better served avoiding in favor of simpler fund-based exposure.

The Diversification and Inflation Argument

Commodities have historically shown a different relationship to broader economic cycles and inflation compared to stocks and bonds, which is the core argument some investors make for including a small commodities allocation — as a potential diversifier or a hedge against certain inflationary periods.

This relationship hasn't held consistently in every historical period, though, and commodities can also be quite volatile on their own, so the diversification benefit needs to be weighed against that added volatility rather than assumed automatically.

Sizing a Commodities Allocation

Because commodities don't generate income and can be quite volatile, many financial professionals who include them in client portfolios generally suggest a relatively small allocation — a diversifying slice rather than a core holding, similar in spirit to how alternative assets are often treated.

As with any specialized asset class, understanding the specific fund's structure (physical holdings versus futures-based) and its costs is worth doing before allocating, since commodity fund structures can behave quite differently from one another even when tracking similar underlying commodities.