Raw Deal

Mike Zaccardi

THE MID-2000s WERE my introduction to the investment world—and even today my thinking is heavily influenced by what was happening then.

Take a moment to recall the 2004-07 period. Stock prices were marching higher, foreign shares were crushing U.S. stocks, small caps were doing all right and you could get a decent interest rate on your savings account. Good times. Another feature of the mid-2000s market: a big bull run in commodities.

Back then, I never dabbled in commodities directly, but I admit to having a big emerging markets weight in my (little) portfolio. Emerging markets funds can be a commodity play by proxy, because developing countries are not only big producers of the world’s raw materials, but also big users of those materials when times are good. While my first investment was a target-date fund within a Roth IRA when I turned age 18, as I got older and savvier—at least in my 20-year-old mind—I tried my hand at some regional emerging markets exchange-traded funds.

Those did well for a time, thanks to the boom in commodity prices. Oil surged from below $30 per barrel in 2001 to above $140 at the mid-2008 peak. Gold shone for a decade starting in 2001. Copper was on fire, as China demanded more and more. Heck, even the cost to transport dry goods was soaring—check out the Baltic Dry Index. In fact, at that time, if you looked back at market history, commodities showed every sign of being a great long-term investment and a superb diversifier for stocks.

Then the party ended. First, the 2008 financial crisis hit. Then we had the 2014-2015 commodity collapse, resulting in a global economic slowdown. Perhaps the carnage culminated earlier this year, when oil prices briefly hit negative $40 per barrel. What happened to this once darling asset class?

At the cycle’s peak in the mid-2000s, you couldn’t flip on the financial news without seeing commercials for commodity plays. Academia was enamored with the strong returns from commodity futures funds, coupled with their low correlation with stocks. Mutual funds with a focus on commodities and real return strategies performed well during the 2000s, only to lose money starting around 2010, just as the U.S. stock market took off. Some commodity funds closed. Those that survived have 10-year annualized returns approaching -5%.

What can investors expect going forward? Here’s the problem: Commodities don’t generate cash flows and profits like a business. The most you can expect to earn from them over the long run is inflation or thereabouts—and that’s before considering fees and taxes. Historically, taking the risk of buying commodity futures has generated healthy gains, but those handsome returns appear to have evaporated as more investors crowd into the market.

Technology is another hurdle for commodity investors. For instance, while technological change might temporarily drive up the price of copper, a more tech-driven world will likely depend less on commodities over the long haul. Think about cars and their increasing fuel efficiency. We’ve seen this play out in the financial markets over the past 20 years, with the Nasdaq Composite index posting incredible returns, while energy stocks have suffered. The global economy continues to shift from one driven by physical assets to one based on knowledge and human capital.

But eventually something will tempt investors to try the commodity play again. It’s the market cycle. Commodities will get hot and commodity funds will attract money. Fear of missing out and herd mentality will take hold. We know how this goes and how it typically ends.

That said, maybe commodities do have a place in a portfolio. After all, bonds still have a role, even though we can be confident returns will be mediocre in the coming decades, thanks to today’s low starting yields. In fact, bonds may even lose out to inflation in the years ahead—and yet those with stock-heavy portfolios will still buy bonds, because they need some sort of cushion for times of market turbulence.

Likewise, stock investors may find commodities are a decent asset class to own. At the very least, they could deliver some diversification magic—and, hey, perhaps we’ll get lucky and catch one of those bullish market cycles.

Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous articles include Cooking Up a StoryPlease Ignore This and Reading the Signs. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at

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