Commodities

An exceptional asset class

With a stock you own a share of a business, and with a fixed income investment you lend money in return for interest. With a commodity, it is about the raw material itself: gold, oil, copper, wheat. That is why commodities behave fundamentally differently from both stocks and bonds. For a Finnish investor they are interesting for three reasons: diversification, occasional protection against inflation or crises, and easier access than before (ETC/ETP, digital services).

This very exceptionality makes commodities both a useful diversifier and an easily misunderstood asset class. Because a commodity produces no cash flow and no profit, its value is based purely on supply and demand, not on returns that can be discounted, as with a stock or a bond. This makes commodities sensitive to real-world shocks (war, harvests, production decisions), and this is exactly where their value in a portfolio comes from: they move by a different logic from financial assets and can rise when stocks fall.

The hardest question: what do you actually own?

It is precisely the ease of access that makes the asset class easy to misunderstand. The same “commodity exposure” can mean three different things: the physical commodity, a product linked to the futures curve (whose return is not the same as the change in the spot price, because roll costs and the term structure have an effect), or a company that produces the commodity (whose earnings depend only partly on the commodity price). An “oil ETP” is not the same thing as “I own the oil price”, and that difference is large.

Understanding the difference in structure is the single most important skill in commodity investing, because the same “exposure” can produce a completely different result. In a futures-based product, contango (an upward-sloping futures curve) eats into the return when the contracts are rolled, so the spot price of oil can rise while an oil ETP falls. A producer company, on the other hand, brings in business risk, debt and management, which can matter more than the commodity price. Before you buy, you therefore need to know exactly what structure you own, not just which commodity you are “investing” in.

Three groups, three different logics

It doesn't make sense to talk about commodities as a single mass. The groups' sources of return and drivers differ clearly. Gold doesn't behave like oil, and wheat doesn't move for the same reasons as natural gas.

Separating the groups prevents a common mistake: assuming that “commodities” move together. Gold can rise in a crisis while oil and industrial metals fall because of fears about demand in a recession. They are almost opposite exposures. That is why the allocation decision is not “how much in commodities” but “in which group, and why”: gold is a safe haven and a store of value, energy is a cyclical growth and inflation exposure, and agriculture is a world of its own, driven by weather and politics.

What commodities have actually returned

This is what sets expectations: according to Morningstar, the Bloomberg Commodity Index has lagged most major asset classes since 1991 and only narrowly beaten cash and inflation. Broad commodity indices have not been long-term return engines like stocks. The value of commodities has been in diversification, sensitivity to inflation and behavior in crises, not in strong real returns. If you start from the idea that they replace stocks, the starting assumption is historically weak. As a complementary layer, their role is easy to justify.

This historical return profile is the most important calibration of expectations in commodity investing, and it directly guides the size of the allocation. Because broad commodity indices have not been long-term return generators on a par with stocks, the role of commodities is diversification and crisis protection, not growth. That means a small, complementary weight. An investor who expects stock-like returns from commodities will probably be disappointed, while an investor looking for a counterweight and inflation protection gets exactly what the historical data promises.

Four ways to invest

• Physical ownership: most natural with precious metals. Clarity and direct exposure. The downsides are storage, insurance and costs. Digital physical ownership makes this more accessible.
• Exchange-traded product (ETC / ETP / ETF): doesn't require a futures account or storage. Think of it as a structure, not an investment thesis: physically backed and futures-based are different things.
• A company that produces the commodity: a mining, oil or fertilizer company gives indirect exposure. You own the business, not the commodity.
• Futures- or derivatives-based: the institutional way to build a broad basket, but the easiest to misunderstand. The return depends on the futures curve and rolling, not just on the spot price.

The difference between the methods is not a technical detail. It decides what risk and return you really carry. Physical gold has no issuer, but storage costs money and outsourced storage involves counterparty risk. A futures-based ETP brings roll risk. A producer company brings equity risk. For most people, a small weight in physically backed gold or a gold ETC is the most natural and simplest way to get commodity exposure. A broad futures basket is an unnecessarily complicated first step, and its expected return has also historically been weak.

Portfolio size guides you, and taxation is part of the choice

• Under €100,000: not the foundation of the portfolio. If you want exposure, gold is the most natural starting point: a small weight in physically backed gold or a gold ETC. A broad futures basket is an unnecessarily complicated first step.
• €100,000–500,000: a justified complementary allocation, with gold as a safe haven and energy/ETCs for diversification. Understand physical vs. futures-based.
• Over €500,000: a separate strategic layer, with gold as a reserve and energy as cyclical exposure. Direct futures mandates are often better than retail ETCs.

Taxation is part of choosing the product: buying investment gold is VAT-free in Finland, but a capital gain on gold is taxable capital income, as are capital gains on ETF/ETP products.

Putting portfolio size and taxation together shows that commodity investing is not just about “how much” but “through which structure and which tax treatment”. Buying investment gold is VAT-free in Finland, but a capital gain on gold is taxable capital income, as are capital gains on ETF/ETP products. In a small portfolio, gold is the most natural and often the only justified commodity. Only with greater wealth do energy as cyclical exposure and direct futures mandates come into the picture, and even then as a complementary layer, not the foundation.

The hardest question: what do you actually own

Ease of access makes the asset class easy to misunderstand. The same “commodity exposure” can mean three different things whose returns differ fundamentally: the physical commodity, a product linked to the futures curve (whose return is not the same as the change in the spot price, because roll costs and the term structure have an effect), or a company that produces the commodity (whose earnings depend only partly on the commodity price).

An “oil ETP” is not the same thing as “I own the oil price”, and that difference is large. In a futures-based product, contango (an upward-sloping futures curve) eats into the return when the contracts are rolled, while backwardation can add to it. This difference in structure explains why the spot price of oil can rise while an oil ETP falls. Before you buy, you need to know what structure you own.

Inflation protection and behavior in crises

The strongest argument for commodities is that they often protect you exactly when stocks and bonds suffer: in inflation spikes and supply shocks. When the price of energy or raw materials rises, it both causes inflation and benefits the owner of commodities. This makes them a structural counterweight to nominal investments.

Their behavior in crises is not uniform, however: gold works as a safe haven in most crises, but cyclical commodities (oil, industrial metals) can fall in a recession as demand weakens. That is why “commodities as an inflation hedge” needs to be made more precise: gold is the most reliable crisis hedge, while energy and industrial metals are more of an inflation and growth exposure. Different groups protect against different risks.

Taxation is part of choosing the product

Taxation is worth taking into account in your choice. Buying investment gold is VAT-free in Finland, but a capital gain on gold is taxable capital income. Capital gains on ETF/ETP products are also taxed as capital income. In neither form is the capital gain tax-free.

So taxation doesn't automatically make one structure better. With physical gold, storage costs money, while an ETP is usually more liquid and easier to manage. It is worth checking the current tax rules before you choose.

Common mistakes with commodities

Typical mistakes: expecting commodities to generate returns on a par with stocks, even though broad indices have historically returned poorly; confusing the structure (a futures-based ETP ≠ the spot price); forgetting the effect of contango, which quietly eats into futures returns; and too broad a first step into a complicated futures basket when gold would be enough.

The deepest mistake is buying commodities with the wrong expectation. They are not a growth engine but a diversifier and a crisis hedge: a small complementary layer, not the foundation of the portfolio. When you understand their role correctly, commodities can improve the resilience of a portfolio. When you buy them looking for returns, the outcome is often disappointing.

How to approach commodities: a checklist

Approaching commodities comes down to a few points:

• Expectation: a diversifier and crisis hedge, not a growth engine. Broad indices have returned poorly.
• What you own: physical, futures-based or a producer company. They are different things.
• Group: precious metals, energy or agriculture. Different drivers and roles.
• Gold first: the most natural starting point in a small portfolio, with a clear safe-haven role.
• Structure and contango: in futures-based products, rolling affects the return.
• Taxation: buying investment gold is VAT-free, but a capital gain is taxable capital income, like a capital gain on an ETP.

Commodities are a complement, not the foundation. When you understand their role and structure, a small allocation (with gold at its core) can improve the resilience of a portfolio in crises. But you shouldn't expect returns from them the way you would from stocks.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns. Gold is not covered by the investor compensation scheme or the deposit guarantee scheme.

How commodity exposure is implemented in an ETF or ETC wrapper, physical or futures-based structure: Commodities and precious metals in an ETF wrapper →