Portfolio investment: Are commodities useful?

Lei Yan, Philip Garcia

Research output: Contribution to journalArticlepeer-review


This paper examines the usefulness of commodities in an investor's portfolio. Using data on three generations of commodity indices and 15 individual commodity futures for 1991–2015, we find that incorporating most commodity products does little to improve the portfolio's Sharpe ratio especially in an out-of-sample context. The only exception is the third-generation commodity index that is based on a momentum strategy and can substantially enhance portfolio performance. When estimation errors are reduced using a shrinkage estimator, the resulting optimal portfolios are more diversified and stable over time, and importantly, commodities play a much smaller role in terms of risk reduction in portfolios.

Original languageEnglish (US)
Pages (from-to)43-55
Number of pages13
JournalJournal of Commodity Markets
StatePublished - Dec 2017


  • Commodity index
  • Estimation error
  • Portfolio diversification

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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