UBS believes commodities are regaining importance within investment portfolios as inflation concerns, geopolitical uncertainty and changing market dynamics encourage investors to reconsider the asset class.

In a new report, the bank outlined 10 key lessons for commodity investing, examining how commodities behave, how they fit into diversified portfolios and the risks investors should consider before increasing exposure.

According to UBS, persistent inflation pressures, competition for strategic raw materials, growing interest in the real economy and declining confidence in bonds as a diversification tool have all contributed to the renewed appeal of commodities.

Four investment arguments under the spotlight

The report reviews four widely cited reasons for investing in commodities: portfolio diversification, inflation hedging, downside protection and long-term return enhancement.

UBS said commodities have generally demonstrated low correlations with stocks and bonds, helping diversify portfolios, although it warned that “these relationships can weaken during market downturns.”

The bank also said commodities have historically performed well during inflationary environments but may struggle when inflation remains subdued.

Gold stands out as a defensive asset

UBS noted that defensive characteristics differ across commodity sectors.

Gold has consistently acted as a safe-haven asset, while energy commodities can provide protection against supply-related shocks. However, the bank cautioned that commodities as a whole do not always offer dependable downside protection.

Performance expectations should also be realistic, as returns depend on allocation size, investment timing and changes in roll yield.

Diversified exposure remains the preferred approach

For investors seeking exposure, UBS recommends a modest allocation of only a few percentage points within a diversified portfolio.

The preferred implementation method is “a diversified, regularly rebalanced commodity futures portfolio” because it represents “the simplest way to capture broad benefits.”

The bank added that “Targeted positions can be useful but involve higher volatility and execution risks.”

UBS concluded that financing commodity allocations with bonds rather than equities helps preserve portfolio volatility but increases sensitivity to disinflation, while equity-funded allocations have the opposite effect.

Overall, the bank said commodities “have historically offered diversification and some inflation-hedging characteristics, though both come with limitations,” and investors should be prepared to tolerate extended periods of weaker performance.

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