Commodities - The Production Asset Class

By EC Assets Research Team, Real Assets Research · Published 19 May 2026 · Updated 16 October 2026

Commodities: Commodities are physical raw materials traded as fungible goods on regulated exchanges. Returns derive from production economics, storage costs, and roll yield, not from corporate cash flows.

What Commodities Are

Commodities are standardised raw materials: energy such as crude oil and natural gas, industrial metals such as copper and aluminium, precious metals such as gold and silver, and agricultural products such as grains, livestock, coffee and sugar. Unlike shares or bonds they produce no cash flows. Their prices are set by supply, demand and the cost of storing them.

Most investors hold commodities through futures, directly or through index funds and ETFs. That choice shapes the return, because a futures investor does not earn the spot price change alone.

How It Works

The return of a fully collateralised futures position has three parts. The spot price change is what most people think of. Roll yield comes from replacing expiring contracts with later ones: in contango, when later contracts trade above spot, prices drift down towards spot as each contract nears expiry, which costs a long holder money; in backwardation, the drift works in the holder's favour. Collateral yield is the interest earned on the cash that backs the position.

Which curve shape prevails depends on inventories. When stocks are ample, storage and financing costs push later contracts above spot; when stocks are scarce, holders value having the physical commodity at hand, a benefit known as the convenience yield, and near contracts trade above later ones. Working (1949) documented this link between inventories and futures spreads, which explains why roll yield varies so much between commodities and over time.

Erb and Harvey (2006) show that roll returns, not spot price changes, explained most of the long-run differences between individual commodity futures. Gorton and Rouwenhorst (2006) found that an equally weighted, collateralised commodity futures index earned returns similar to equities from 1959 to 2004, with negative correlation to stocks and bonds and positive correlation to inflation. Levine, Ooi, Richardson and Sasseville (2018), using data back to 1877, find a positive long-run premium and show that returns were higher when futures curves were in backwardation.

Commodities respond to the economic cycle and to supply shocks. Energy dominates production-weighted indices such as the S&P GSCI, so those indices move closely with oil.

Worked Example

The iShares S&P GSCI Commodity-Indexed Trust (GSG) tracks the S&P GSCI Total Return index, which includes roll yield and collateral interest, less fees. Comparing it with the S&P GSCI spot index separates roll yield from price moves:

Yahoo Finance monthly closes for GSG and the S&P GSCI spot index; US CPI-U December to December (BLS); S&P 500 price index (Cboe).

From July 2006 to October 2026, the fund lost 27.9 percent while the spot index rose 48.9 percent. The difference, mostly roll yield in contango markets such as 2020, swamped both the price rise and the interest earned on collateral.

The inflation link is strong. Annual returns of the fund had a correlation of 0.80 with US consumer price inflation from 2007 to 2025, and in 2022, when inflation reached 6.5 percent and the S&P 500 fell 19.4 percent, the fund gained 24.1 percent. Its correlation was 0.42 with the S&P 500 on monthly returns, but in 2008, a demand collapse, it fell 45.8 percent alongside equities.

When It Applies (and Limitations)

Index construction matters. Production-weighted indices are dominated by energy, so their results reflect oil far more than metals or agriculture; equally weighted or enhanced indices behave differently.

Roll yield changes with inventories. Contango and backwardation shift with storage levels and demand, so the drag of 2006 to 2026 is not a forecast.

The inflation hedge depends on the source of inflation. The correlation above reflects a period in which energy drove many inflation swings; inflation from wages or services may not lift commodity prices.

Short sample. Nineteen years of annual data include few inflation episodes, so the correlation is uncertain.

Gold is a separate case. Erb and Harvey (2013) find gold's real price is strongly linked to real interest rates and an unreliable inflation hedge over practical horizons.

Why It Matters for Institutional Investors

Inflation protection. A modest allocation can offset some of the losses that energy-driven inflation inflicts on bonds and equities, as in 2022, which is relevant for macro regime planning.

Choose the implementation. Index choice, roll methods and collateral management determine a large part of the return; strategies that roll into less contangoed contracts or follow trends, such as managed futures, behave very differently from a passive index.

Size for volatility. Commodity indices can fall by a third or more in a year, so allocations within the asset allocation should be set by risk contribution rather than by expected return.

Read the product. Commodity funds can diverge sharply from the spot prices their names suggest.

References

1. Gorton, G., & Rouwenhorst, K. G. (2006). Facts and Fantasies about Commodity Futures. Financial Analysts Journal, 62(2), 47-68.
2. Erb, C. B., & Harvey, C. R. (2006). The Strategic and Tactical Value of Commodity Futures. Financial Analysts Journal, 62(2), 69-97.
3. Levine, A., Ooi, Y. H., Richardson, M., & Sasseville, C. (2018). Commodities for the Long Run. Financial Analysts Journal, 74(2), 55-68.
4. Erb, C. B., & Harvey, C. R. (2013). The Golden Dilemma. Financial Analysts Journal, 69(4), 10-42.
5. Working, H. (1949). The Theory of Price of Storage. American Economic Review, 39(6), 1254-1262.