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Commodities Compared to Stocks and Bonds

Over the last 45 years, the average annualized return to an investment in commodity futures has been comparable to the return on the S&P 5006. Both outperformed corporate bonds. At the same time, Stocks and Commodity Futures have experienced higher volatility than Bonds. Commodity Futures significantly outperformed US equities during the 1970s and periods within the 1980s; this trend has reoccurred in the 2000s to the present time.

SP500 vs STARK300 Index

Notice in the comparison between the S&P 500 and Stark 300 CTA Index the better overall consistency of positive returns and smoother growth of the Stark 300 Commodity Trading Advisor (CTA) index.4

The recent poor performance of stocks and the low inflation-adjusted returns provided by the US bond market has led to increased speculation within commodity futures. Several academic studies that have recently garnered much attention have shown that commodity futures offers similar potential returns for nearly equal or less risk than US equity investments.3

Risks and Return of Commodity Futures
Annualized monthly returns, 1959/7-2003/4

Taken over a long time-horizon (1959-2004), stocks and commodities experience similar risk-return ratios.3

Risk Premium of Commodity Futures, Stocks and Bonds
Annualized Monthly Returns 1959/7 – 2004/125

	Commodity Futures	Stocks	Bonds
Average Returns	5.23	5.65	2.22
Standard Deviation	12.10	14.58	8.47
T-statistic	2.92	2.57	1.77
Sharpe ratio	0.43	0.38	0.26
% returns > 0	55	57	54

Sharpe ratio is a measurement of risk-adjusted returns. Note the relatively high average returns per unit of risk for Commodity Futures (of 0.43) compared to stocks and bonds.

Notice in the following chart the comparison of volatility amongst alternative investments and traditional investments. On average, stocks and bonds experience overall increased volatility compared to commodity markets. Thus, studies have shown that utilizing commodity futures within modern portfolios tends towards more consistent returns for less overall risk.5

Volatility of Commodity Futures, Stocks, and Bonds
Monthly Price Volatility, 1992-20045

Quick Topics:
	What are Alternative Investment?
	Commodity Futures for Profit Speculation.
	Commodities Futures for Portfolio Diversification.
	Commodities Compared to Stocks and Bonds.

Risk Disclosure: There is a risk of loss in futures and options trading. Past performance is not indicative of future results. Nothing in this site is intended to be a recommendation to buy or sell any futures or options market. All information has been obtained from sources, which are believed to be reliable, but accuracy and thoroughness cannot be guaranteed. Readers are solely responsible for how they use the information and for their results.


Research Sources:
1.	Sesit, Michael R. ”Commodities Enter Investment Mainstream: Pension Funds, Universities Jump Into the Asset Class; High Returns, Low Risk”. 9 Sep 2004. Wall Street Journal.
2.	Barclay Group, LTD. “Money Under Management in Managed Futures”. 1 Mar 2006.
3.	Gorton, Gary (University of Pennsylvania) and Rouwenhorst, K. Geert (Yale School of Management ). “Facts and Fantasies About Commodity Futures”. June 14, 2004. Yale ICF Working Paper No. 04-20.
4.	S&P Corp. and D.B. Stark & Company. S&P 500 Index and Stark 300 Managed Futures Index Data. Dec 1981 to Dec 2005. Starkonline.com.
5.	Chicago Board of Trade (CBOT). “Managed Futures Portfolio Diversification Opportunities”. 2005.
6.	The Center for International Securities and Derivatives Markets (CISDM) of the University of Massachusetts Amherst. “The Benefits of Managed Futures 2005 Update”. June 2005.
7.	Chicago Board of Trade (CBOT). “Trading in Futures – An Introduction”. 2005.