Graphic: Commodities gaining steam

The U.S. has been experiencing higher inflation rates, with CPI readings showing at least 5% annual increases over the past three months. The Federal Reserve believes this will prove fleeting, but there is disagreement from economists over how long it will last. If it persists, commodities can prove an effective inflation hedge.

Recent strength: The Bloomberg Commodity Total Return index returned 34.4% over the year ended Aug. 13. Long-term returns have been less stellar, but commodities have provided strong gains during periods of high inflation. In the 1970s, when oil prices more than quadrupled, the index annually returned more than 32%.

Bloomberg Commodity Total Return index

Portfolio impact: Adding commodities to the traditional 60/40 mix subtracted 40 to 90 basis points from longer-term returns during a period of benign inflation. However, commodities’ strong performance over the past year added 110 basis points to the return.

Return scenarios*

Modest risk reduction: Breaking the 20-year returns into five-year periods, adding commodities to an equity and bond portfolio showed slightly lower risk for most intervals. From the start of 2001 until the present, the 60/40 portfolio’s beta was 0.64 compared with 0.62 for the portfolio with commodities added.

Risk and return comparisons*

Active edge: Over various periods, the median commodity fund outperformed the Bloomberg Commodity Total Return index. Through March 31, the one-year median return on 29 actively managed funds was 37.1%, besting the index by more than 200 basis points.

Median fund vs. index

*Uses MSCI ACWI, Bloomberg Barclays Global Aggregate Credit Total Return and Bloomberg Commodity Total Return indexes. Source: Bloomberg LP, Morningstar Inc.