Commodities and portfolio diversification: Myth or fact?

This study investigates whether commodities yield diversification benefits to stock portfolios for loss-averse investors using a sample of 16 individual futures contracts and one index of commodity futures. We confirm that commodities are extremely sensitive to market economic conditions. While the energy sector performs better under economic expansion periods, precious metals yield diversification benefits at most times. Livestock commodities display a high potential to reduce risk, especially during recessions. The role of commodities is similar during the global financial and European sovereign debt crises. Commodities are also relevant in the uncertain period of 2020–2022, although patterns are changing. During the COVID-19 period, precious metals do not increase performance, while at the beginning of the 2022 war in Eastern Europe, we find a generalized improvement in portfolios that outperforms all the other subperiods. Overall, this is not a myth, as there remains a diversification benefit, albeit a time-dependent one with a decreasing trend.